Ethics@Work: Matchmaker, matchmaker

October 22, 2010 00:13

Finding a job is a little bit like finding a match.

Asher Meir.

58_asher meir. (photo credit: Courtesy)

Last week the Swedish Academy awarded the Nobel Memorial Prize in Economics to Peter Diamond, Dale Mortenson and Christopher Pissarides for their contributions to understanding the role of search and matching in markets, and particularly in the labor market. Their work makes significant contributions to the understanding of what is perhaps the most fundamental ethical issue in economic life: unemployment.

Unemployment is not only an economic misfortune but also a human one. The workplace provides not only income but also a sense of belonging and contribution, particularly for men. As an economic burden, its damaging effects are multiple. The individual suffers a loss of income for as long as he is unemployed; the individual loss of income reflects a loss to the economy as a whole, while the worker’s productive capability lays idle. Furthermore, unemployment can become chronic. In some professions prolonged unemployment leads to a significant erosion of professional skills and contacts, so that it may become more and more difficult to find a new job.

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It is hardly surprising that the battle against unemployment is emphasized in both social and economic policy.

Unemployment is also a bit of a mystery.

Why should such a valuable resource as human productive ability ever sit idle? Other productive assets, like trucks or tractors, seldom sit idle for months or years; the price adjusts to equalize supply and demand and after a short time these good make their way to the highest bidder. Why should labor be so different? In introductory economics courses, there is a tendency to relate to the market for labor in the same way we relate to the market for tomatoes: if there is an excess supply, it must be due to some market intervention such as minimum wage (wage too high), labor unions, or simple unwillingness to work at the going wage. Naturally this approach finds it hard to explain why there are unfilled jobs at the same time there is unemployment. Does that mean that wages are simultaneously too high and too low? In macroeconomics we get a little more specific and explain that there is “frictional” unemployment, the natural time it takes for a worker to find a job. But there is little effort to explain what this “friction” is, how it works, and why it should be present.

The three prize winners helped explain how the market for labor is different than the market for tomatoes. All tomatoes are alike, or at least fall into a small number of well-defined categories. But every worker, and every workplace, is unique.

Typically, each side is not looking for a standard commodity but rather for a perfect fit – the perfect workplace, the perfect candidate for a job. The labor market has as much in common with the marriage market as it has in common with commodity markets. (It is interesting that the sages of the Talmud likened both processes – finding a marriage partner and finding a livelihood – to the parting of the Red Sea.) Grasping the ramifications of this unique characteristic leads to a number of profound and useful insights in understanding the labor market.

We can see that “unemployment” is measured not only in the people who are out of work, but also in the underemployed – those who are in inadequate matches, workplaces that don’t really suit the needs and talents of the worker or workers who don’t have the exact skills and characteristics that the employer requires.

We can see that when a worker exerts himself to find a job, he is helping not only himself but also the employer. (And vice versa – when employers recruit diligently they are doing workers a favor.) This has an important corollary. In general we view unemployment insurance as something that harms the efficiency of the labor market because it reduces the incentive to find work; it is justified because it provides insurance against job loss. But based on the research of the Nobel laureates, perhaps unemployment insurance can improve efficiency by giving workers the patience to wait around for a truly suitable match.

This insight draws our attention to the reciprocal relationship between workers and employers, and how this can lead to lost opportunities.

Eighty years ago the British economist John Maynard Keynes explained how depressions can result from a vicious circle: There is no demand for goods because there are no jobs, and there are no jobs because there is no demand for goods. A similar thing can happen in the labor market: Employers don’t exert much effort in finding workers because they feel the workers are not working to seek them out, and the workers aren’t investing much effort in finding work because the employers are not searching vigorously for workers. Labor market stimulation can in some conditions help ameliorate this situation.

Another insight is that the process can in some instances put power in the hands of the employers. We have all had the experience of going into a store and checking the price of a product, only to find that the price is not really satisfactory; and yet we buy it anyway because who has the time and energy to go check a bunch of other stores, keeping in mind that there is no guarantee that we will find a better deal. This phenomenon enables merchants to charge higher prices for their goods.

In the labor market, a worker may go to a job interview and discover that the conditions and the pay are not really what he expected yet he agrees to work anyway because he lacks time and energy to go through more and more interviews, keeping in mind that there is no guarantee he will find a better job.

Under certain conditions, this parallel phenomenon can enable employers to pay lower wages.

Because of the unique combination of public and private sorrow, unemployment can be seen as the central ethical issue in modern economic life. The new insights introduced by the recent Nobel laureates raise the hopes of waging a more effective battle against this phenomenon and its plagues. Asher Meir is research director at the Business Ethics Center of Jerusalem, an independent institute in the Jerusalem College of Technology (Machon Lev).

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