Monday, October 11, 2010

A Nobel Prize for Explaining JOLTS Data

JOLTS – the Job Openings and Labor Turnover Survey – gathers data that most novice macroeconomists find surprising: that there are huge numbers of people hired during recessions, and huge numbers fired in expansions (see this earlier SUU Macroblog post).

How is that possible? The answer is costly search and matching.

This year’s Nobel Prize in economics went to Diamond, Mortensen and Pissarides. Diamond did older work on search, and Tyler Cowen of Marginal Revolution calls the award to Mortensen and Pissarides the closest thing the Nobel committee has ever done to making an award based on one paper.

The policy implications are unusual:

  • Unemployment insurance is a huge disincentive to finding work, but the gross costs of reducing it come mostly from workers rather than employers, and the net benefits to society aren’t large.
  • Discouraging employers from firing  increases the unemployment rate a little, but hits output really hard because inefficient jobs get retained.
  • Paying a subside to employers to hire workers has huge benefits, most of which accrue to workers. In particular, the gross benefits to workers are large enough that you could tax some of them away to completely pay for the subsidy and still have workers’ net benefit stay positive.

A funny thing happens when you actually work out the economics: otherwise “conservative” economists often come up with policy implications that sound “liberal”.

Marginal Revolution has an excellent summary of these guys contributions to economics (here, here, here, here, here, and here).

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