What We Learn From Search Models

Preparando-me para a aula de hoje sobre mercado de trabalho, fiz um breve search de comentários sobre os novos laureados com o Prêmio Nobel de Economia, e cheguei a este interessante piece do também Nobel Prof. Paul Krugman, em sua coluna em The New York Times: http://krugman.blogs.nytimes.com/2010/10/11/what-we-learn-from-search-models/.

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Paul Krugman

October 11, 2010, 1:18 pm
What We Learn From Search Models

This year’s Diamond/Mortenson/Pissarides Nobel is for work on search models of unemployment. What’s that? And why does it matter?

Full disclosure: this is not an area I know as well as I should. But I think I know enough to give a quick read.

So, this line of research concerns the fact that many markets, and above all the labor market, don’t fit the classic supply-and-demand paradigm, in which prices quickly rise or fall so as to ensure that everyone who wants to buy finds someone willing to sell and vice versa. Instead, the labor market, or the housing market, is one in which heterogeneous sellers confront heterogeneous buyers, and it takes time and effort to find appropriate matches. That’s why the unemployment rate isn’t zero at “full employment”; it’s why structural unemployment is an issue.

This year’s Nobel is for economists who worked out the implications of this observation, both for empirical observation and for policy.

With regard to current concerns, probably the most relevant paper is Blanchard and Diamond on the Beveridge Curve — the relationship between job vacancies and unemployment.

What’s the moral of that paper? It shows that structural unemployment is a real issue, and that the volume of structural unemployment shifts over time. It also shows, however, that short-term movements in unemployment are overwhelmingly the result of overall shocks to demand — in effect, Keynesian business cycles.

And given the debate now underway about whether we’re mainly facing a rise in cyclical or structural unemployment, it’s definitely worth noting that they give us a simple way to make that distinction:

The economy, however, is subject to two types of shocks with quite different effects. Changes in the level of aggregate activity cause rates of job creation and job destruction to move in opposite directions, while changes in the intensity of the reallocation process cause them to move in parallel.

What do we see? Here’s some recent data from the Cleveland Fed:

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Overwhelmingly, what we’ve seen is a simultaneous fall in vacancies and rise in unemployment, which tells us that this is an aggregate demand shock.

What about that uptick at the lower right? That worried many people, myself included. But we should have read Blanchard and Diamond more closely: they carefully explain why business cycles tend to produce counterclockwise spirals in the unemployment/vacancies relationship, so this was just what we should have expected.

Deeply relevant work. And by the way, for those of us in the modeling business, Peter Diamond’s work is breathtaking in its elegance — nobody cuts through the complexities with such grace.

A happy day for economic theory.

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