In search of search theory

This is going to be a long and wonkish post, so I’ll just give the dot-point summary here, and let those interested read on below the fold, for the explanations and qualifications.

* The dominant model of unemployment, in academic macroeconomics at least, is based on the idea that unemployment can best be modelled in terms of workers searching for jobs, and remaining unemployed until they find a good match with an employer

* The efficiency of job search and matching has been massively increased by the Internet, so, if unemployment is mainly explained by search, it should have fallen steadily over the past 20 years.

* Obviously, this hasn’t happened, but economists seem to have ignored this fact or at least not worried too much about it

* The fact that search models are more popular than ever is yet more evidence that academic macroeconomics is in a bad way

In search of search theory

Following the most recent Internet dust-up over the state of macroeconomic theory, I’ve been thinking a bit more about search models of unemployment. I first ran across these models when I was a student in the 1970s, a period of very high unemployment.

The basics of search models are simple and seemed, at least in the 1970s, reasonably realistic. Workers can look for jobs in various ways, all more or less time-consuming: looking at help wanted ads (which used to come out twice weekly in Oz), cold-calling potential employers, and asking friends and relatives to look out for openings. Since workers aren’t fully informed about the labour market, it doesn’t (at least in a good market) make sense to accept the first offer that comes along. Rather, it’s worth looking until you have a good idea what wage the market is willing to pay, then taking a job at that wage.
What was new about the search theories was the idea that this process could explain not only the inevitable frictional unemployment, but also cyclical unemployment associated with recessions. Various different ideas come into play here. First, the models imply that if there is a sudden but temporary shock leading to large-scale job losses, it will take some time to return to full employment (or ‘normal’ rates of unemployment). Second, economic shocks may create more uncertainty about market wages, leading workers to search longer.

The Internet changes all of this. It’s possible to find all the publicly advertised jobs in any given field, anywhere in the world, in a matter of seconds. With a little more effort, it’s possible to get lots of information about firms that may be hiring, even if they haven’t advertised vacancies. And, much more than in the past, its possible to get lots of information about potential employers, to assess whether the jobs they have on offer are in fact likely to be good ones.

With such a massive improvement in the efficiency of search we’d expect to see two things:

(i) shorter time spent searching, and therefore lower unemployment; and
(ii) better matches between workers and jobs, which should increase productivity and wages, and reduce subsequent quits and fires.

Both predictions were made in the early years of the Internet and, at least until 2008, the general view was that they were proving correct, though more slowly than had been expected.[^1]

But experience since 2008 has been completely the opposite of what a search model would predict. Unemployment rates have risen and employment rates have fallen. Worse still, the duration of unemployment has increased greatly. And there’s no evidence that this has been offset by an improvement in matching. Rather, lots of people have been forced to accept jobs that make little use of their education and experience, suffering wage losses as a result.

What has been the response of academic macroeconomists? As far as I can tell, almost nil. I was prompted to write this post by the debate over Kartik Arthreya’s Big Ideas in Macroeconomics. Responding to my observation that the word ‘unemployment doesn’t even appear in the index, Steven Williamson pointed out that Athreya spends several pages on the general properties of search models [^2], presenting them as the primary basis of unemployment theory. And Athreya seems to be on the money here. The Economics Nobel (yes, yes, Bank of Sweden etc, I know) is a lagging indicator, but the 2010 award to search theorists Diamond, Mortensen and Pissarides certainly does not indicate a view that such models are fundamentally flawed.

Athreya acknowledges the problem, sort of, by saying that “search is not really about searching” and observing that, if it were, the Internet should have reduced search costs. But if search isn’t about searching, what is it about? Athreya doesn’t say, and his brief discussion of housing markets doesn’t get us far – these are much more location-specific than job markets, and the Internet hasn’t changed the process all that much.

If search models aren’t the right way to think about unemployment, what is the right way? The simple answer is that unemployment is primarily a problem of macroeconomics not of labor markets. If aggregate demand is far below the productive capacity of the economy, workers will be unemployment and capital will be idle.

But there is still a puzzle here, one that search models were designed to solve. Why doesn’t competition between unemployed and employed workers work quickly to reduce wages to the point where demand equals supply and where there is no involuntary unemployment [^3]? The problem seems not be, as search models assume, that employers and potential workers don’t know about each other. Rather, it’s that employers can’t easily use the threat of new hires at lower wages to drive down the wages of existing workers (of course, this happens, but it’s clearly costly and risky in terms of worker morale). There’s quite a lot of literature looking at this, and I’ll try to post on it another time.

[^1]: Simple models of search can’t rule out cases where only one of these effects is seen. For example, the improvements in the quality of matches might be so great as to encourage people to spend even more time looking. But that doesn’t seem very plausible. It would imply a big increase in productivity and wages that hasn’t been observed. Here are a couple of references

Autor, D. H. (2001): Wiring the Labor Market,” Journal of Economic Perspectives, 15, 25-40.

Krueger, A. B. (2000b): The Internet is lowering the cost of advertising and searching for jobs,” The New York Times, July 20.

[^2]: With his characteristic grace, Williamson also pointed out that another blogger had also observed the absence of standard macroeconomic topics in Athreya’s index and accused me of plagiarising this point for my own review. As any reviewer knows, the index is always the first place you look in a book, so its unsurprising that the oddity of Athreya’s jumped out at two of us.

[^3]: The same question applies to capital, though it seems to be asked far less often. Recessions and depressions are characterized by idle factories and farmland, empty offices and shuttered shops. Competition between the owners of these assets should drive the associated rents down to a level where supply equals demand. In fact, however, the adjustment process seems mostly to rely on scrapping or depreciating enough of the existing stock to remove the excess.

37 thoughts on “In search of search theory

  1. Lets not forget that IT along with the Internet has been a destroyer of jobs. Gone are the days when clerks were a profession and the slide rule a computer.

  2. Doesn’t all of this assume that the job seeker (and the prospective employer) are primarily acting as rational agents? I realise it’s not exactly an easy task to reason about the behaviour of partially irrational agents, but that seems to be a pretty fundamental requirement for modelling this situation (and for that matter, modelling almost anything in real-world economics).

    It’s a particularly personal question for me right now, since I’m in the process of being made redundant. It’s the first time I’ve been in this situation since joining my current/previous employer straight out of Uni ten years ago, and I’m finding myself quite irrational in my reactions to the various job advertisements and the like that I’m looking at. There’s a complex mix of emotions that very strongly influences my judgement of each of the listed openings, many of them the kind of snap judgements on limited/no information that then end up being very hard to remove later on.

    All of that says to me that any attempt to model this as a primarily (or even largely) rational process of matching skill sets to job requirements is going to be very problematic.

    Obviously, when you aggregate all of this irrationality across a nation-sized population things will be a lot more predictable, but any attempt to predict ahead of time how it would work out would need to be very strongly based on historical evidence and an extremely empirical approach. This is messy biology, not pure, clean mathematics.

    Are there people out there working on this kind of approach? Because the only stuff I hear about reading a range of economics blogs and economics articles in a fairly broad selection of online media (both “mainstream” and alternative) is giant brains thinking really hard about the fundamentals of a problem and trying to express it in beautiful mathematics . . .

  3. Ikonoclast :
    So where is the logic and economics sense in throwing all these million dollar machines (humans) on the scrapheap? Let alone discussing the inhumanity of it. Our system can be seen to be crazily wasteful when you look at it properly.

    That implies that the total human value of the Australian population is well short of $20 billion. In a $1.5 /Trillion/ economy.

    There’s a seriously big multiplier somewhere between that 24-year-old cut off point and a lifetime’s worth of economic contribution.

  4. @Simon Fowler
    Unless my tired brain is out by far too many orders of magnitude, and the multiplier is rather large in the other direction . . . 2*10^13 is definitely bigger than 1.5*10^12, so yeah . . .

    Of course, that’s a million dollars amortised over 24 years, and then paid for over the next 50-60 years. Too tired to try and reason out how it’d all work out, but I think that’d imply that you spend maybe ten years paying off your debt to the economy, then the rest of your productive life producing excess.

  5. Are we considering the ‘black economy’ of prostitution, methamphetamine manufacture, drug smuggling and purveying, and burglary? There’s a lot of it about amongst the humans on the ‘scrapheap’ and those who can no longer face the official machine.

    Looking for work is so time consuming and requires such ridiculously contrived paperwork in form of resumes etc. whereas once you just presented with a letter from someone who knew you and your exam results. It is soul-destroying. Anyone trying to maintain a career has to maintain an illusion of continuous employment and faultless relations with past employers, some of them psychopaths, who have all power in phone references. It’s a war of attrition.

    And then, what kind of society is this that makes most people dependent on jobs rather than able to supplement their income from land? We are truly wage-slaves. All our worth is judged by paid employment.

  6. @Ikonoclast
    China also gets more bang for its buck because its land costs (housing and office/warehouse, business premises rent) are much lower than Australia’s. There is little margin for profit after these and related costs, such as fuel.

  7. There are a number of posts above that talk about the irrationality of the system, mine among them. I think it is clear we mean “irrational” in a broad sense and not just a narrow economic sense.

    I will talk anecdotally now. I am noticing people of my acquaintance (in a general age cohort which runs from about age 50 to age 65) who are disaffected with and feeling alienated from our current work system. If it was just me, I would discount it. But I see many people now, who I judge as more patient than me, more social, more well adjusted, with a better work ethic and so on… And these people are by and large feeling disaffected and alienated, not with our entire society but certainly with the work system. These are mature people who are competent to excellent in their chosen work or field; educated people, enlightened people, well-meaning people, well-socialised people, well-integrated people.

    Almost to a man and to a woman they are finding the current work environment in both public and private enterprise “toxic”, “bullying” and treating them as if they have no brains, no initiative, no good ideas and no experience. Now, I suspect my anecdotal sample is biased in two ways. It consists of corporate employees (public and private) and it consists of people who are workers or line managers. There are no middle managers, executive managers or capitalist owners in my sample and there are no self-employed people or small business employees in my sample.

    Now, I suspect that some groups somewhere are very happy with the way our society and workplaces are being run. I guess we have to ask who they are, what they are doing and why they are making the lives of so many ordinary, good people more miserable (at least between 9:00 to 5:00 on weekdays).

  8. The most common death bed lament on the two lists I have seen is —— ‘i wish i hadn’t worked so much ‘.

    Most work too much while the rest suffer from not working at all.

  9. I once looked after a very old man who was only about 5′ 2″ in his heyday. He had since shrunk. He had always been skinny and weak and not too good at concentrating. He came from an appalling background of deprivation and terror in a family with too many children. He finished his days in a psychogeratric ward, where, although he was a sober alcoholic, they inebriated him with benzodiazepines. He went downhill and got the shakes again and lost any confidence. He had a couple of days of life left in him and was semi-comatose. Suddenly he came to. “Oh God, oh God!” he cried. “I have to go to work. I must have slept in!” I had the honour of informing him that he would never have to go to work again. “Never?” he asked. “Never,” I assured him. “Thank God!” he cried, with tears of happiness and relief in his eyes and fell back into his coma with a smile on his face. That has always exemplified for me how bloody hard work is for some people, what an utter calvary.

  10. @Ralph Musgrave #24
    I agree, the standard response, Keynes’ sticky wage hypothesis, is not mentioned by JQ, how come? Marx would add the idea that labour as a productive factor is different to capital – it has an irreducible minimum reward based on its physical and emotional consumption and reproduction needs.

    Arguably Keynes is undermined by less transparency nowadays, with pay less referenced to awards and collective agreements, and the expansion of the labour market by virtual technology to interstate and foreign workers who have lower minimum labour maintenance standards is relevant, as someone above mentioned. But the OP is about US isn’t it, where collective 2-3 year labour contracts still operate in large sections of the economy, and different to here.

    I don’t agree that the internet means more useful info is available about employers – how much is more objective or higher quality than previously? In these days of a degraded official media, virtually all firms of any size have greater capacity to spin their situation and do damage control via internal or external communication hacks, as well as create fake representations in social media.

    People looking for jobs have a strong incentive to identify between signal and noise. But reputation, a less ephemeral measure actually built over time, and based on trustworthy sources incl. “word on the street” (not the internet) is as relevant as ever.

    By chance an Oz article today by Marie Wilson at the Uni of SA Business School talks about faulty selection mechanisms due to the internet’s facilitation of large applicant pools. For efficiency (but not effectiveness), quick and dirty filters are applied, the first one screening out people by their names, which often suggest gender, ethnicity, age, religion, social class. A lot of research has been done in western countries about this and it shows stereotypes about “unlikely” or favourable candidates (ie. the latter being people who are mini-me) apply so that capabilities are not assessed in an unbiased way. Jobseekers with names like Coriolanus or Anunciation or Gao Shun are advised to change their name to Cory or Anne or Josh! (Often not so easy to do either.) Part of the blowback is that someone who starts meddling with their identity jeopardises their personality and may handicap themselves that way.

    One example is how orchestras started having auditions for musos behind screens, and the percentage of women hired more than doubled. A female applying for a science position is less likely to be hired.

    What surprises me is how the recent guy who got a top job with Myer as GM – Strategy and Bus Dev was found to be a complete faker of his CV and experience yet was selected by a hiring agency and then by Myer (for one day). One anecdote sure, but reveals something about protocols and checks by “professionals”.

  11. I recently had a personal confrontation with some of these issues, when my job was declared ‘redundant’ and I was not offered re-employment in one of the positions that replaced it in the same area (not that it affects what follows, but the stated grounds for these decisions were regarded as spurious not only by myself but also by my long-term colleagues, both those also made redundant and those who survived the purge, and we agreed that although plausible guesses could be made it was impossible to be certain what the real causes were).

    Though I can’t recommend the experience, things haven’t turned out too badly for me, as I have been accepted for redeployment in another area of the same organisation. But before that happened, I spent some time thinking about my options. Reading that it’s possible to find all the publicly advertised positions in any given field reminds me of my difficulties in judging which ‘fields’ I should look in and even in knowing which fields _exist_. It may be there are employers somewhere out there with vacancies going begging for which I would be ideally suited, except that I’ve never even imagined such positions.

    My employer, being a public-sector employer, like my past employers, is routinely required to advertise vacancies (which is how I found the job I’ve been redeployed to); but I was repeatedly assured, while I was in my employment limbo, that most jobs now are not filled by the advertisement of vacancies.

    I don’t think of myself or my experience as typical, but these are the thoughts that come into my head.

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