We are pleased to announce that Choice Asset Management has relocated. Our new address is:
9390 Research Blvd, Bldg 1, Suite 412 Austin, TX 78759.
Our telephone numbers and email addresses remain the same. The main office numbers are (512) 302-6060 or (800) 611-2286. Our general contact email address is info@choiceami.com.
The Nobel Foundation has just awarded the Memorial Prize in Economic Science to three academic economists for their pioneering work on the theory of unemployment. The prize went to Peter Diamond (MIT), Dale Mortensen (Northwestern University) and Christopher Pissarides (London School of Economics).
The prize is both timely and meritorious. Unemployment rates in the United States and the European Community have remained stubbornly high in the wake of the recent financial crisis, confounding government officials. (According to the Department of Labor, the non-farm unemployment in the United States currently stands at 9.6 %.)
The Nobel Prize winners developed the idea that labor markets experience “frictions” related to “search.” That is to say, a labor market deviates from a model of perfect information exchange because employers and employees have trouble matching with each other effectively.
In a frictionless market, forces of supply and demand constantly readjust, creating a moving equilibrium. If widgets start building up in inventory, the manufacturer will curtail production or cut prices. If demand then accelerates, the manufacturer will step up production or increase price, or both. The problem with labor is that it doesn’t always act like a widget. Jobs often require special skills or experience, and the people with those skills may not live where the demand exists, or they may need special further training to be ready. Another problem is human aging.
Economists already knew (or at least supposed) that certain government policies can increase the “stickiness” of unemployment. A government-imposed generous minimum wage can inhibit employers from offering full-time jobs on the books for low skilled positions. Rules or traditions making it difficult to fire employees can boomerang, inhibiting hiring of new workers. Expensive requirements for fringe benefits, such as employer funded health care or disability insurance, can also slow hiring. Thus, classic “progressive” demands of the trade union movement can engender hidden deleterious consequences for workers (or at least new workers).
The Diamond-Mortenson-Pissarides model, as developed over time, takes into account a complex variety of factors, including education, number of vacancies, number of job seekers, pickiness of seekers, and so forth. As with many fruitful models in economics that break new ground, its practitioners sometimes reached surprising and apparently paradoxical findings. For example, the existence of unemployment insurance (contrary to the objections of free market advocates) could encourage some workers to take job risks they otherwise might have shunned.
The “search friction” idea turned out to be extraordinarily fruitful. According to commentary in the New York Times by Edward Glaeser (a professor of economics at Harvard University), economist George Stigler wrote the foundational academic paper (“The Economics of Information,” 1961; Stigler himself won a Nobel in 1982). Other economists have subsequently applied similar thinking to such problems as dating, residential housing and used car markets.
Diamond, now 70 years old, served as a mentor to Federal Reserve Chairman Ben Bernanke, then a graduate student at M.I.T. President Obama nominated Diamond to the Fed Board of Governors. Senator Richard Shelby of Alabama, ranking minority member on the Senate Banking Committee, has been holding up the nomination, asserting that Diamond lacks proper background in monetary theory. Maybe the Nobel magic will help him.
One important implication of the Diamond-Mortenson-Pissarides thinking is that helping to match workers with new opportunities makes a lot more sense than vainly trying to preserve the old jobs–however difficult such adjustments may seem.
Copyright © 2010, Andrew Szabo.
