This year’s Nobel economics prize was awarded to two Americans and a British-Cypriot for developing a theory that helps to explain why unemployment can persist even when job openings are available.
The economics prize is not one of the original awards established by Alfred Nobel’s 1895 will, but is instead a relatively new prize. Established in 1969, the Bank of Sweden Prize in Economic Sciences in Memory of Nobel – its official name – is funded through proceeds from a 1968 donation by Sweden’s central bank.
This year’s winners – Americans Peter Diamond and Dale Mortensen, and British-Cypriot Christopher Pissarides – were honored with the $1.5 million prize for their illumination of the obstacles that may keep buyers and sellers from finding each other in some markets as efficiently as economic theory traditionally predicts.
In some markets, where information is low-cost and individual buyers and sellers are not particularly unique, parties can quickly find each other and engage in mutually-beneficial exchanges. Any buyer is happy to trade with any seller as long as the price seems reasonable to each.
But in other markets, the fit matters more. And as Diamond’s early work in the 1970s suggested, sometimes fit matters a lot. An extreme example is the “market” for spouses. Because marriage is a lifelong joint endeavor, men and women search extensively for partners with whom their eventual marital union may fully flourish as God intends.
And because searching for just the right person takes time, effort, and perhaps many first dates, plenty of eligible men and women remain single at any given moment. Websites like match.com and eHarmony are popular with singles, because those sites help reduce search costs by improving the amount of information available to singles about potential mates.
Diamond, Mortensen, and Pissarides have studied extensively markets with such search costs. When both buyers and sellers are unique, it requires considerable searching for each to find just the right fit. Even in a well-functioning housing market with plenty of available homes, buyers may struggle to find homes they like. So, the buyers keep looking.
All three recipients of this year’s prize have carefully extended Diamond’s work to better understand why we may observe persistent unemployment in the labor market even when there are plenty of job openings available, and with interesting policy implications – especially for unemployment insurance programs. Their work shows that more generous unemployment insurance programs will unambiguously lead to longer average unemployment spells, a result with very strong empirical support.
There are two ways to interpret this policy conclusion, and neither is incorrect. On one hand, quite generous welfare benefits may – at the margin – backfire in the sense that they make finding employment less urgent than it would be otherwise, resulting in less search effort by job seekers. This interpretation provided part of the motivation behind the Personal Responsibility and Work Opportunity Reconciliation Act of 1996 (the “welfare reform” bill), which shortened the amount of time individuals may receive welfare payments without working. The bill made unemployment look less attractive.
But on the other hand, meaningful work is a gift. God desires that men and women, the only creatures that He made in His image, imitate him through their creative work. Work is our collaboration with God’s creative purposes. Reformers such as John Calvin and Martin Luther stressed the idea, gleaned from Scripture, that every believer is called by God to certain work – a vocation – and has a duty to respond to that call. And Pope John Paul II, in his letter on human labor, observed that work is “one of the fundamental dimensions of [a person’s] earthly existence and of his vocation.” Thus while low unemployment is an important goal, we should not be too quick to put policies in place that force unemployed persons to settle too quickly for jobs that are not a good match. Doing so would deny people the opportunity to pursue their unique callings, ones in which each person can exercise stewardship to the glory of the Creator.
The enduring contribution of this year’s economics Nobel winners will be their suggestion that unemployment insurance alone cannot guarantee meaningful work, and that future policy efforts to reduce unemployment would do better to focus on improving information and reducing search costs, leading to enhanced opportunities for meaning and human flourishing in labor markets. In a recent interview with the Associated Press, Pissarides pointed to the UK’s New Deal for Young People, which directly attaches government assistance to job seeking and training (rather than unemployment per se), as one example “very much based on our work,” he said.