(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
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.
hardly surprising that the battle against unemployment is emphasized in both
social and economic policy.
Unemployment is also a bit of a
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.
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
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.
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
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
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 firstname.lastname@example.org Asher Meir is research director at
the Business Ethics Center of Jerusalem, an independent institute in the
Jerusalem College of Technology (Machon Lev).