The job market beyond fairy tales

Studies by this year's Nobel winning economists question a liberalism that is not always attentive to 
the worker. The word is now given to governments, without catchphrases on call.

The job market beyond fairy tales

By Vittorio Pelligra
Published on on 12/10/2010

Why do hiring and dating agencies exist? Have you ever tried to ask yourselves why we pay someone to help us make an investment or find a house? And yet, when we go shopping to buy a book or a new washing machine, we make our own choices very well, according to our tastes and pocketbook, without needing any help.

Peter Diamond, Dale Mortensen and Christopher Pissarides, the three economists who were awarded the 2010 Nobel Prize for economics last October 11, must have thought long and deeply about this question, which highlights a difference which is only apparently banal.

Why? The answer lies in the fact that, contrary to what economists have hypothesized for decades, looking for work and buying fruit at the supermarket are fundamentally different activities. It's true that work and fruit both have markets, where producers and buyers meet, establishing an agreed upon price. But it is also true - and here lies the profound intuition of our three new Nobel winners - that some markets, the work market first of all but also others, present "friction". What does that mean? Imagine that you have bought fruit from Mr. Gino. You bring it home, you try it, and you discover that it's not good enough. Tomorrow, you'll probably go to the market, dramatically pass by Mr. Gino's stand to make sure he notices, and this time you'll stop at Mr. Mario's stand to order your pears and apples. 

This operation, changing from one fruit vendor to another, does not cost you anything, and probably gives you the chance to taste better fruit. Ok, enough with our "fruit" example. What about "work"? If we accept a job today, and after years of formation, commitment and friendship with colleagues, the contractual conditions no longer make that work satisfying, you can certainly turn to a new employer, any Mr. Mario who not only offers pears this time but better working conditions. However, contrary to the fruit example, leaving a job and especially finding another one can be a costly process - sometimes very costly. It could take weeks, months and even years of unemployment, or perhaps you have to move to another city. These are the costs of the search process - a few examples of the famous "friction" noted above.

And what is the difference in a market with "friction"? A lot. Even small costs can lead a market far away from best results. A competitive market which would produce optimum results without friction can become inefficient in as much as it is a monopoly market. It's as if there was only one employer for everyone. From the worker's point of view, it's the worst thing that could happen!

There's also a second problem: the so-call "external effects". The greater I commit myself to look for work, the less probability there is that other unemployed people, like me, will find a job. My commitment, therefore, will help businesses cover their workforce, but at the same time, I will involuntarily put other workers in difficulty. As a consequence, we'll have some people who put too much into looking for a job and others will put too little into it.

In other words, if the work market is left to itself, it will struggle to self-regulate. It needs to be pushed by public intervention, through rules and incentives, towards the best results. The work done by Diamond and his associates helps us to understand the delicate and complex mechanisms of the job market. In difficult times like ours, this knowledge can truly be useful. For example, it could positively influence industrial relationships. The attitude of businesses and workers' unions, as well as the government, cannot be based exclusively on defending the interests of some people in one category, because as the "external effect" idea shows us, conflict without rules can make us lose everything. 

Even the lesson that we've received from this Nobel, as from that painful one given to us by the crisis of the financial market, teaches us this: that the liberal fairytale about markets that autonomously reach equilibrium bringing us towards the best of possible worlds, is - precisely - nothing more than a fairy tale. Like all fairytales, it does contain a message of truth, but it also helps us understand just how enormously more complex reality actually is. 

The Nobel Prize in economics is given to scholars who complicate economy with their intelligence, as Albert Hirschman would say. This is always more necessary in order to avoid economics from becoming always more specialized and narrow, especially when social problems instead become always deeper and more complex, and citizens demand competent, adequate and timely answers... not easy catchphrases and triumphant announcements.

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