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Ain’t Karma A Bitch?

Economy • October 2010 • Views: 1,053

From the oh geez, look how stupid we really are department of GOP, comes the news that a key Federal Reserve appointment, Peter Diamond, whose appointment has been held up for months by Sen. Richard Shelby (R-KKK), receives the Nobel Prize for Economics.

Some very just desserts on this Columbus Day morning: Peter Diamond, a lauded economist at MIT, won the Nobel Prize, along with Dale T. Mortensen and Christopher A. Pissarides. The three economists won for their examination of “markets with search frictions.” In Diamond’s case, he focused on labor markets and unemployment.

Diamond’s specialty, if you didn’t read the bolded sentence in the block quote, is labor markets and unemployment. Nope, we couldn’t use that kind of expertise right about now, could we?

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3 comments

Bob Levin Mon, Oct 11, 2010 1:00:55pm

What he says, Diamond and colleagues, is that unemployment benefits need to be cut, regulations need to be trimmed--and that workers need to adapt their expectations to changing market conditions. This will all work to decrease what they call, 'market friction' where there is high unemployment and yet many jobs going unfilled.

I don't think this is the solution to our high unemployment.

Jeff In Ohio Tue, Oct 12, 2010 8:05:42am

Can you site where Diamond has suggested "unemployment benefits need to be cut, regulations need to be trimmed--and that workers need to adapt their expectations to changing market conditions is the solution to search friction"?

Here is a recent quote from Pissarides:

[Link: webcache.googleusercontent.com...]

In a telephone interview during the Nobel news conference in Sweden, Professor Pissarides said that he thought the work being honored had one lesson in particular for today’s policymakers: “What we should really be doing is make sure the unemployed do not stay unemployed for too long, to try to give them direct work experience,” so that they “don’t lose their attachment to the labor force.”

If anything, the policy solution being put forward here is not to reduce unemployment compensation to incentivize workers to move to where jobs are (if indeed that is even possible in this economy), but for the government to, ahem, stimulate job growth by investing in the economy.

More from the Economist's View:

The work is considered by many researchers to be particularly timely in today’s economic climate, in which many developed countries like the United States are facing stubbornly high unemployment rates. For example, the theory developed by the three economists has been used to try to design alternative unemployment benefit systems, and to determine how hiring and firing costs affect the unemployment rate.

Now, I don't know about you, but I find it attractive to have people with divergent and creative mindsets looking at the same problems and proposing solutions, rather then a monolithic class of former bankers.

Here's Krugman's take on Search Models:
[Link: krugman.blogs.nytimes.com...]

This year’s Diamond/Mortenson/Pissarides Nobel is for work on search models of unemployment. What’s that? And why does it matter?

Full disclosure: this is not an area I know as well as I should. But I think I know enough to give a quick read.

So, this line of research concerns the fact that many markets, and above all the labor market, don’t fit the classic supply-and-demand paradigm, in which prices quickly rise or fall so as to ensure that everyone who wants to buy finds someone willing to sell and vice versa. Instead, the labor market, or the housing market, is one in which heterogeneous sellers confront heterogeneous buyers, and it takes time and effort to find appropriate matches. That’s why the unemployment rate isn’t zero at “full employment”; it’s why structural unemployment is an issue.

This year’s Nobel is for economists who worked out the implications of this observation, both for empirical observation and for policy.

Bob Levin Tue, Oct 12, 2010 11:43:09am

Yesterday it was the first thing that came up on Google News--details about his work. Today, I can't find a thing about his work, only that he won the prize, went to Yale, yadda yadda. I'll keep looking. Unfortunately, there have been thousands of articles written since yesterday. The most I could find has to do with a vague notion that workers have to try harder to find jobs. That's not enough to cite. Even Wikipedia doesn't go into details about his work.

By your citation, Krugman isn't eager to talk about the theory, saying that he's just not very knowledgeable about their work. That might tell you something.

Oh well. For someone who just won the Nobel, you'd think there would be quite a bit on information about what he believes, since unemployment is such a significant issue.

Your first citation doesn't necessarily imply the conclusion you draw. It could also imply a cut in benefits, to make the unemployed search for work with more intensity. That's a common mode of economic thought. Remember, their area of research is how can high unemployment co-exist with many jobs that remain unfilled. It's not how to create jobs--it's that there are jobs that no one is taking.

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