Dale T. Mortensen

by on October 11, 2010 at 7:52 am in Economics | Permalink

He has been on the Northwestern faculty since 1965 and he is a Carnegie-Mellon Ph.D. (I am surprised to read how old he is).  His Wikipedia page is here and his home page is here.  Here is a short bio.  Here is Mortensen on Google Scholar.

His seminal paper is: D. Mortensen and C. Pissarides (1994), 'Job creation and job destruction in the theory of unemployment.' Review of Economic Studies 61, pp. 397–415.

This is one of the best and most important papers in the last twenty years of economics (note that it builds upon the analysis of Diamond).  Here is the abstract:

In this paper we model a job-specific shock process in the matching model of unemployment with non-cooperative wage behaviour. We obtain endogenous job creation and job destruction processes and study their properties. We show that an aggregate shock induces negative correlation between job creation and job destruction whereas a dispersion shock induces positive correlation. The job destruction process is shown to have more volatile dynamics than the job creation process. In simulations we show that an aggregate shock process proxies reasonably well the cyclical behaviour of job creation and job destruction in the United States.

The key point in this paper is to show how unexploited gains from trade can persist in labor markets.  It seems odd that desperate workers would simply turn down jobs, even for lower wages, so why doesn't an economy move back rapidly to full employment?  One way of putting the point is that negative shocks alter search behavior by both workers and employers and so fewer favorable matches come about.  In particular, the rate of job destruction is extremely high.  There is also an asymmetry between job creation and job destruction, due to option value, and thus discrete cut-offs for job creation and job destruction, and that leads to a central result of the paper:

The dynamics of job destruction, however, are different, because the rise in the reservation productivity…leads to an immediate destruction of all jobs with idiosyncratic components between the two reservation productivities. Job destruction also rises for reasons similar to the ones that led to its decrease when price increased, since with higher reservation productivity firms are more likely to destroy jobs as they are hit by job-specific shocks. But the increase in job destruction immediately after the cyclical downturn has no counterpart in the behaviour of the job destruction rate when price increases, or in the behaviour of the job creation rate. This imparts a cyclical asymmetry in the job destruction rate and in the dynamic behaviour of unemployment. The short-run cyclicality of the job destruction rate increases, the job destruction rate leads the job creation rate as a cause of the rise in unemployment and the speed of change of unemployment at the start of recession is faster than its speed of change at the start of the boom…

That's explaining a lot of the observed time series behavior of unemployment, and in a strict rational model with no arbitrary assumptions about market imperfections.  (And the simulation supports the analysis and its relevance.)  You are, as an employer, quite willing to destroy a job because you still have the option of rehiring favorably later on; keeping a job going doesn't yield the same calculus of benefits.  Here is a good summary passage from the paper:

We have shown that at higher common components of labour productivity (alternatively when the aggregate price distribution translates to the right), the probability that an unemployed worker finds a job is higher and the probability that a job is destroyed is lower within given finite lengths of time. An examination of the dynamics of job creation and job destruction when it is known that labour productivity changes randomly has revealed that the anticipation of cyclical change reduces the cyclicality of job creation, and the short-run response of job destruction to shocks increases the cyclicality of job destruction…

As I read this work, it shows that "cyclical" and "structural" causes of unemployment are not always conceptually distinct but rather they interact in harmful ways.  An implication is that looking at the Beveridge Curve (which is stocks, not flows) won't necessarily identify the nature of unemployment at any point in time.

If there was ever a Nobel Prize given for a single very important paper, it is this one.

Here is a paper extending and defending his basic unemployment model.  Here is Mortensen's lengthy 1984 survey on seach and unemployment.  Here is his later, 1999 survey with Pissarides, which also recaps their own work.

In some of the policy applications of these models there are mixed employment effects from unemployment insurance (not necessarily negative, because waiting relieves crowding in the search queue) and positive effects from a job destruction tax.  Wage subsidies don't always work out well for job creation.  A key point is to analyze not just the first-order effect of the labor market policy but also its incidence, and thus its second-order effects on search and job matching.  Mortensen, along with Pissarides, has made the analysis of labor market policy considerably more sophisticated; here is one presentation of their main policy results.  Here is another version of the same.

Here is his piece on the importance of personal contacts in labor markets.

Mortensen has a whole book on wage dispersion, reviewed here.  The key question is why workers with similar characteristics often are paid differently and the answers lie in job search frictions.

Here is a recent paper on growth through product innovation (you can google to an ungated version, though the pdf has no link).  Both in this paper and in the job market work you can see the strong influence of Schumpeter, and the idea of creative destruction, on the research of Mortensen.  It's about time people stopped laughing at "recalculation" models of our downturn because one version of them just won a Nobel Prize.

In sum, picking Mortensen (and his co-author Pissarides) shows that the committee sees unemployment as a central issue of the day.  At the same time, there aren't always easy answers to this problem.

Finley October 11, 2010 at 4:53 am

I had the chance to meet Dale two years ago. He is very nice, and I would agree that he seems much younger. I would have guess him to be in his late 50s.

Chris R October 11, 2010 at 6:44 am

I think that where this differs from the "recalculation" story that some have been pushing is that recalculation isn't the impulse in DMP; it's an effect of another impulse. For a more sophisticated version of the story check out the stuff Wouter den Haan's been doing with news shocks in a DMP framework. News shocks have been kind of hot in the past ten years but that whole literature suffers from empirical problems that might have something to do with…you guessed it…labor market frictions.

I also second Finley; Dale is very very nice.

Ithaca October 11, 2010 at 11:46 am

I was a grad student at Northwestern, took Dale's Labor Econ class. Was a privilege to be taught by an amazing mind. He was also very down to earth and kind, in an otherwise tough crowd. I was delighted to read the news this A.M. Congratulation to Dale, and to Northwestern! A few years ago, when Myerson won, I had the same thought as above, but Myerson has moved on to Chicago.

Mohit Satyanand October 12, 2010 at 4:21 am

Sitting far away, in New Delhi, India, I follow the news headlines and some of the debate on unemployment in the US, and wonder why the Minimum Wage never enters into the discussion. Do you think lowering (or even abolishing) the minimum wage would have an impact on employment.

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