Lessons in The Transactional Costs of Supply & Demand: The Nobel Prize and The Unemployed

If you're among the 14.8 million Americans looking to re-establish your career and find meaningful employment -- and that doesn't count those whose benefits have expired -- you know the frustration of applying for advertised positions, not receiving a response and continuing to see the position posted for many months on end. Before the Great Recession it was logical to assume that a posted position represented a real job opening that was approved through HR, internally funded and needed to be filled. While this must be true for a number of postings, many seem to be fishing expeditions searching for diamonds in the sea of people looking for work.

Monday's WSJ quotes Jeff Joerres, chief executive of staffing firm Manpower Inc. who claims "What we're seeing is delay, delay, ... clients are taking a lot longer to fill positions, even when they've been presented with the right candidate [and] he expects the problem to persist at least through next year." Or as Korey Stephens, a former mortgage-finance manager who has been looking for work since early 2007, quoted in the same article claims "They're just putting their feelers out, and if they find someone who's ridiculously awesome then maybe they'll hire them." But three professors who just won the Nobel Prize in economics have taken a deeper dive in explaining this phenomenon.

According to yesterday's Financial Times, "The economics profession's greatest accolade was bestowed on Mr Diamond and his fellow laureates, Dale Mortensen and Christopher Pissarides, for fundamental contributions to understanding how supply and demand are matched when there are transactions or search costs involved." Their theory on the friction between willing buyers and sellers, while applicable to a broad range of market transactions -- including marriage, real estate and monetary policy -- is particularly revealing when applied to currently sustained high levels of unemployment. Specifically, "Frictions in matching workers and jobs -- including transaction costs, search times and the difficulty of knowing how a job or a worker will turn out -- mean that labour market outcomes can be inefficient. In particular, the market may produce outcomes in which unemployment persists even though there are workers willing to labour for a wage employers are willing to pay." Which "has shown that this makes possible market outcomes in which supply and demand are matched inefficiently or not at all."

And today's WSJ coverage summarizes that "The three economists' work was widely applied to examine the problem of high unemployment in Europe during the 1980s and 1990s. One conclusion was that many of Europe's unemployed had been out of work for so long, and their skills had degraded so much, that they found it far more difficult to find a job." Clearly "The U.S. could fall into the same trap, Mr. Diamond said -- one reason he believes that policy should be aimed at creating jobs as quickly as possible. [and goes on to say] More fiscal stimulus would be the most obvious thing to do..."

The precise, form, structure and cost of that stimulus is, of course, the billion dollar question.

William Busch

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