What Today’s Nobel Says About the US Unemployment Crisis

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Peter Diamond, co-winner of the 2010 Nobel Prize for Economics, is congratulated by colleagues. (Brian Snyder/REUTERS)

Why doesn’t the unemployment rate ever reach zero? Economists, who generally believe that supply tends to meet demand, long pondered this question. Even in good times, i.e. not now, there are people who can’t find work. And even in bad times, i.e. now, there are job openings. With over 14 million people out of work and looking for a job, you would think every available job would be filled. But that’s not the case. Not now and not ever.

On Monday, the Nobel Prize committee awarded the prize for economics to the three scholars who have done the most to explain this phenomenon. Two of the winners are Americans, Peter Diamond of MIT and Dale Mortensen of Northwestern. The third winner is Christopher Pissarides, who teaches at the London School of Economics and was born on Cyprus. For all you Nobel Prize Economics trivia buffs: Pissarides is the first Cypriot to be award a Nobel in Economics. Tyler Cowen at Marginal Revolution has done a very good job of rounding up and summarizing the three economists’ work.

Like most of economics, what they have found about why the jobless and ready-employers don’t find each other seems obvious. You have to find out there is job opening you are interested in. Employers need to get resumes. It takes a while for both employers and employees to make the decision that this is what they want. This is the type of everyday stuff that it takes a while to get economists, who often acknowledge numbers before reality, to believe in. And these guys were able to convince other economists that there is something called “search friction.” But here’s what’s important: These guys just didn’t come up with a fancy term for everyday life, they came up with a frame-work to study the problem of why people stay unemployed longer they should and what can be done about it.

This Nobel prize is particularly topical right now. First of all, for a political reason. President Obama nominated Peter Diamond to the  Federal Reserve this summer, and so far Republicans have held up his nomination. But most of all for the obvious reason: We are in a period where we have a lot of unemployed people and politicians are stumbling around trying to figure out to solve the jobless problem. So what would today’s Nobel Prize winners do to solve the current problem of the persistently unemployed? And does the awarding of the prize boost the Democrats or the Republicans in their different plans to lower joblessness?

Much of the debate on the unemployment problem in Washington is around whether we are doing enough or too much to help the unemployed. Republicans argue that extending unemployment benefits causes people to stay out of work longer. It also increases the national debt, and that makes employers nervous about the future of the economy, therefore they hire less.

Democrats think we are not doing enough. Jobs create jobs. Meaning once one person has a pay check, they will spend money, creating a need for other companies to hire. So they believe the government should step in and create those first jobs to get the economy rolling again.

Where do the Nobel prize economists side on that debate? They would side more with the Democrats on this one, though not exactly. It seems clear that the three economists think we need to be doing more to help the unemployed. But just creating new jobs may not be the answer. They would argue, I think, we need to attack the problems that cause joblessness and not just create new jobs. Peter Diamond has argued that unemployment insurance is good and brings down long-term unemployment. It gives job searchers the time they need to find a job that they are happy with and can commit to. Rather than take a job that they think is beneath them just to quit and find a new job when the market gets better. So I don’t think Diamond would argue to cut unemployment benefits. Perhaps this is why Republicans have blocked his nomination.

Cowen, who is generally conservative, cheers the inclusion of Pissarides as the one of the three economists winning today who is less “Keynasian,” meaning he would be less for a New Deal type of approach to government spending to create jobs.  But even Pissarides would like to see governments do more job training and other efforts that help young people find work. And it seems like we need programs like that more than ever in the US. Teenagers have had a particularly hard time finding work in this recession. And many economists have argued that’s not a trivial matter. What’s more, one of the programs that Pissarides supports is in part named after the “New Deal”:

Speaking from his north London home, Pissarides told The Associated Press the announcement came as “a complete surprise” though his work had already helped shape thinking on both sides of the Atlantic.

For example, the New Deal for Young People, a British government initiative aimed at getting 18-24-year-olds back on the job market after long spells of unemployment, “is very much based on our work,” he said.

“One of the key things we found is that it is important to make sure that people do not stay unemployed too long so they don’t lose their feel for the labor force,” Pissarides told reporters in London. “The ways of dealing with this need not be expensive training – it could be as simple as providing work experience.”

Lastly, it I think all three economists would be for anything that could kick-start the housing market, be that foreclosure mitigation or more home buyer tax cuts or maybe the acceleration of the foreclosure process. One of the key problems for connecting people who are looking for jobs with work they would excel in is location. If you can’t sell your house, many people would be reluctant to move. Remove that barrier and more people might be able to connect with new jobs.

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