Observations on search theory in modern macro and in blogosphere macro

Let’s say you are 22, full of energy, don’t feel you need to marry soon, and have lots of cash in your bank account.  Many people in this position feel they can “date around” a lot, without fear of the repercussions.  They can enter into short-term relationships without much agonizing in advance, and simply break up if it doesn’t work out.

Alternatively, imagine you are 39, run down and vulnerable, wanting kids soon, and in a precarious financial situation.  You probably won’t date casually the same way.  You will treat every romantic relationship as if it is a significant investment.  You will be more careful, because the cost of mistakes is higher, and the cost of serial “running around” is higher too.  Search is tougher and you will apply higher standards to search.

In good times employers are like the 22-year-old and they will take chances with many different employees.  In 2009-2013, they often have seemed more like the 39-year-old.  They are waiting and watching, rather than trying out lots of dates.

Of course this analogy points to just one possible factor, it is hardly a comprehensive account of current unemployment, even if you ignore any possible problems in the story.

Note that the terms “involuntary unemployment” and “voluntary employment” do not make sense here, and usually it is a mistake to insist on one or the other.  There are jobs and for that matter dates in North Dakota, so how high does the cost of moving have to be to distinguish one category from the other?  Is theory going to supply an answer here?  No.  When you see arguments for either the “voluntary” or “involuntary” nature of unemployment, that is a good sign someone is trying to mix moral issues into positive issues.  It is also a move away from the concept of marginal analysis.

It is better to say that the quantity and quality of employer search is suboptimal and the outcomes are suboptimal too.  In this particular case, employers become choosier in their search, and raise their discount rates, without taking into account the social costs those decisions impose on the pool of available labor.

You also will note this explanation, and many others like it, differs from the traditional invocation of “sticky wages.” Sticky wages do apply to a large number of already employed workers (pdf), but the concept does not readily transfer to workers who are looking for a job.  There is a great mass of evidence for sticky nominal wages for workers who already hold jobs.  There is a good but not great deal of evidence for sticky and indeed possibly irrational reservation wages for the current unemployed, but this phenomenon is conceptually indistinguishable from what some people (not me) like to call “voluntary unemployment.”  If you insist on stickiness for the unemployed, you will quickly end up somewhere you probably do not wish to go.

Taking established labor market results for the employed and automatically transferring those same concepts to the unemployed, without critical scrutiny, is one of the most common mistakes in blogospheric economics.  You don’t see that mistake committed very much in standard academic macroeconomics and that is one of the advantages of modeling.

I sometimes hear it suggested that the sticky wage incumbent workers have “eaten up” all of the nominal gdp and there are only breadcrumbs left for the unemployed.  Yet most companies seem to be sitting on enough cash and enough profits to make additional hires if they want to; it cannot be asserted that the sticky wage incumbents are “soaking up” most corporate liquidity.  Plus in a full model velocity and credit will be endogenous so a cash constraint would end up doing all of the work here, not sticky wages.

I once heard Bryan Caplan mention (I am not sure how seriously) that insiders will resent outsiders hired at lower wages and thus the outsiders cannot get hired.  With the decline of unions if anything I observe the opposite — insider resentment is directed at the higher-wage hires — but in any case there is simply no mass of evidence behind this claim, not enough for it to serve as a major explanation of one of our largest economic and social problems.  One is led to this kind of move if one has to justify the claim that unemployment is “involuntary,” whereas a better question is why the quality of job market match is going down.

There is the macroeconomics of the academy and the macroeconomics of the blogosphere.  The latter does not devote nearly enough attention to search theory, combined with other market imperfections of course.

If you’d like to read one recent macro piece on search, there is Marcus Hagedorn and Iourii Manovskii, “Job Selection and Wages over the Business Cycle,” published in the latest AER but with an ungated version here.  It is not some kind of explanatory holy grail but it does illustrate the kind of questions contemporary macro is asking.