Economics

A Nobel Prize "for unemployment theory"

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Marginal Revolution's Alex Tabarrok explains how economists Peter A. Diamond, Dale T. Mortensen, and Christopher A. Pissarides' work in unemployment theory earned them the Nobel Prize today:

A key breakthrough was to realize that the problem was not how to explain unemployment per se but rather how to explain hiring, firing, quits, vacancies and job search and to think of unemployment as the result of all of this underlying microeconomic behavior.  Notice that the underlying behavior involves not just workers looking for jobs but also employers looking for workers so explaining unemployment would require a theory of job search, worker search and matching and each aspect of the theory would have to be consistent with every other aspect; i.e. how much workers search depends on how much employers are searching (e.g. advertising) and vice-versa and also on the quality of matching and all of these considerations need to be addressed together.  It was Mortensen and Pissarides in particular, building on work by Diamond, who built just such a consistent model.

Read the whole post here.

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  1. Good to know you can now get a “Nobel” for figuring out that more unemployment benefits means more people deciding to stay unemployed instead of finding a job.

  2. Nobel prize can now be obtained by pointing out the obvious. News at 10:00, after the game…

    1. I have high hopes that my groundbreaking theory that people will pay more for higher quality will get the recognition it deserves from the “Nobel” committee one day.

  3. A key breakthrough was to realize that the problem was not how to explain unemployment per se but rather how to explain hiring, firing, quits, vacancies and job search and to think of unemployment as the result of all of this underlying microeconomic behavior.

    That is a mind-bogglingly good insight. My heart-felt “Congratulations!”

  4. The Economics Nobel Prize was started 100 years after Nobel’s death by the Swiss Central Bank. While it was refreshing to see the Peace prize to go to someone who actually deserved it this year, one has to remember that the Prizes are one of the oldest PR Stunts in existence so that people wouldn’t remember Nobel as “the merchant of death.”

    1. I don’t know the full history, but in all fairness, did Nobel invent dynamite to be used as a weapon, or was it done so against his wishes?

      If the former, it’s a PR stunt. If the latter, then I’d say he was just trying to offset the damage others would do.

      1. This is directly from Nobel’s will:

        [My money goes to a bunch of special people] and one part to the person who shall have done the most or the best work for fraternity between nations, for the abolition or reduction of standing armies and for the holding and promotion of peace congresses.

      2. My understanding is that he invented it originally as an improvement over liquid nitro in mining and railroad applications. The instability of the prior led to many accidental deaths.

    2. by the Swiss Central Bank.

      No, by the Norwegian one.

  5. Wait… you mean “unemployment” is just the result of quitting or being fired and then having an unsuccessful job search? Nope, can’t quite wrap my head around that one. I can see how this was the key breakthrough….

    Now if they could only explain how the price of commodities can fluctuate in an environment where supply and demand can vary…

  6. How is explaining, or attempting to explain something better, pointing out the obvious? I’d think most people ideologically geared toward the individual and individual rights would be ecstatic that someone is trying to explain something dominated by macroeconomic discourse (unemployment) in microeconomic terms. More specifically dealing with individuals, their desires their motives, and their relationship with commerce and business instead of the squishy distant view currently used to describe unemployment.

    Or is this just plain old hate on something we don’t fully comprehend day?

    1. It seems pretty obvious to us that a jump in unemployment rates is caused by individuals becoming unemployed. It’s frustrating to find out that this is surprising to intellectuals.

      1. Also there is the underlying assumption that it is the article’s author that is incorrectly presenting the “big breakthrough” as realizing that unemployment is driven by people being out of work, rather than the Nobel winner’s work actually being based on this fact. Just because we understand “there’s more to it than that” doesn’t mean we aren’t going to poke fun at it when the opportunity presents itself.

        1. I guess it’s better than the other human reaction to shit people don’t understand.

  7. “A key breakthrough was to realize that the problem was not how to explain unemployment per se but rather how to explain hiring, firing, quits, vacancies and job search and to think of unemployment as the result of all of this underlying microeconomic behavior.”

    Wow.

    So the unemployment rate is related to both the supply of and demand for labor.

    Who would have thunk it?

    I guess given all the Keysesean kool-aid drinkers who have come out of the woodwork in the past couple of years, such elementary economic concepts really do stand out in contrast.

    1. Wouldn’t this be a slight departure from Keynes unemployment theories?

  8. Here’s my cunning plan: I enter an Economics PhD program. Then, I re-read Ricardo, taking everything he said in Principles of Political Economy and Taxation and paraphrasing it. I then publish my “new treatise” as a rebuttal to the current mercatilists out there.
    Step 3: win the Nobel Prize and Profit!

    1. Maybe not a Nobel but a nice tenure track job.

    2. Paraphrasing isn’t enough. You have to translate it to math.

  9. “Alex Tabarrok explains how…”

    You spelled Trebek wrong.

  10. The problem with rewarding people for creating “models” is that those models get used in other people’s models which in turn get taken seriously by unelected yet influential policy wonks and pundits who are inordinately impressed by “prestigious” awards.

    1. Don’t the player model, hate the game model users.

  11. The figures we usually hear about the number of jobs created is the net figure but in the United States in August, for example, there were 4.1 million hires (and 4.2 million separations).

    This is incredible, if true.

    1. Really? Why?

      Seems perfectly reasonable.

      1. 300 million people in a country, and you think 4.1 million getting hired or leaving a job in a month is incredible?

        You do know that some industries, like fast food, have annual turnover rates above 100%?

        Oh, and the government’s definition of unemployment has a serious disconnect from what everyone else would consider unemployment. I’ve never been officially unemployed, and yet there have been times when I’ve been looking for a job and couldn’t find one I wanted to do right away.

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