John Quiggin Searches for a Use for and Explanation of Labor-Market Search Theory: Afternoon Comment

John Quiggin thinks about search models, and points out that they–Diamond, Mortenson, and Pissarides and company–are not a good and promising path for modeling cyclical unemployment. Moreover, he questions whether they are a good and promising path for modeling frictional unemployment. Where is the decline in frictional unemployment that ought to have accompanied the rise of the internet, after all. Margins and search costs and inventories have tightened elsewhere in the economy. So why not in the labor market?

Taking search theories of the labor market as metaphors really does not help us very much. If, after all, as Kartik Arthreya says, “search is not really about searching” then what is search theory about?

It is a puzzle. And it is not one in which I have a great deal of insight: I am greatly disturbed by the fact that I do not think I understand either why our rate of frictional unemployment is so high, or where our cyclical unemployment comes from in any deep sense.

John Quiggin provides a precis:

John Quiggin: In Search of Search Theory: “The basics of search models…

…seemed… realistic. Workers… aren’t fully informed about the labour market, [so]… look… until you have a good idea what wage the market is willing to pay, then tak[e]… a job at that wage…. The Internet changes all of this…. With such a massive improvement in the efficiency of search we’d expect to see… (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. But experience since 2008 has been completely the opposite of what a search model would predict…. 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, presenting them as the primary basis of unemployment theory…. 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….

If search models aren’t the right way to think about unemployment, what is the right way?… 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? The problem seems not be… that employers and potential workers don’t know about each other… [but] 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….

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…