October 12, 2010
The Nobel prize in economics has been awarded to Peter Diamond of M.I.T., Christopher Pissarides of the L.S.E., and Dale Mortensen of Northwestern university for their work on labour markets showing that markets do not work smoothly and that there can be mismatches between the skill sets of the unemployed seeking work and the job vacancies on offer.Their work is a refinement of the job search literature and it has a strong supply side orientation including the impact of trade unions and the welfare state upon the matching process. Frictions and mismatches is something which Keynes discussed briefly in his General Theory when he points out in his chapter on prices that he is dropping the assumption that factors are homogeneous and that in fact they are likely to be hetrogeneous, hence not perfect substitutes.
Congratulations to the three for their considerable accomplishment.
However, in the current climate where policy makers and politicians generally are looking for excuses to avoid aggregate demand stimulus there is a risk that their work will be misinterpreted as a vindication of a strictly supply side approach necessitated by structural mismatches between the skill sets of the unemployed and the demands of the job vacancies on offer. The truth is that supply side frictions can account for only a small proportion of those currently without work and though important it is inadequate aggregate demand that is our principal problem. Policy makers are already inclined to accept the old classical argument that unemployment will lower wages toward the labour market clearing real wage and once efficient job search is restored unemployment will fall. In the current circumstances this is extremely unlikely and policy based on this reading of the theory combined with deficit hysteria will result in prolonged and unnecessary hardship in the American and global economy. By all means improve job search but do so in the context of aggregate demand stimulus.
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