Cookie consent

We use cookies to improve your experience on this website. By continuing to browse our site you agree to our use of cookies. Tell me more | Cookie preferences

Tim Hartford: Working out the job market

File photo of a New York job fair.

Story highlights

  • Economist Tim Hartford: All of us are born unemployed and single
  • If we want that to change, we will have to start looking for a suitable match

Supply and demand is a fundamental economic concept, and unemployment is a totemic economic problem. But apply the concept to the problem, and you will not get very far.

The logic of supply and demand says that if wages are high, lots of people will want to work, but few people will want to employ them; if wages are low, employers will be hungry to go hiring, but few people will want to work. At equilibrium, the number of hours available equals the number of hours people are willing to work. Unemployment is impossible, unless there is a minimum wage -- this suggests, for instance, that unemployment was unknown in the UK before April 1 1999, which is not my recollection. The supply-and-demand approach offers little insight into job-market recessions, or why different countries have such different experiences of employment.

In this year's Royal Economic Society public lecture, Christopher Pissarides, winner of the Nobel memorial prize in economics in 2010, set out to resolve the mystery. Pissarides, along with Peter Diamond and Dale Mortensen, has developed a model of job-matching that has become the standard way macroeconomists think about labour markets.

The basic insight is nothing staggering. There are job-seekers in the world, and there are job vacancies in the world, and the aim is to match seekers to vacancies to create actual "jobs", which are matched pairs of former vacancies and former job-seekers. Searching for suitable vacancies, or suitable employees, is costly, and neither jobseeker nor employer knows whether any match will work out.

In such "search models", unemployment isn't a puzzle; it's the natural state of economic existence, just as being single is the natural state of romantic existence. All of us are born unemployed and single, and if we want that to change, sooner or later we will have to start looking for a suitable match.

Once Pissarides, Diamond and Mortensen began to write models that encapsulated some of these commonsense observations, they discovered a natural explanation for the "Beveridge curve".

    The Beveridge curve is a simple downward-sloping relationship between the vacancy rate in an economy, and the unemployment rate. In good times, vacancies are plentiful and unemployment is low; in a recession, the economy slides down the Beveridge curve to a place where vacancies are scarce and unemployment is high. More interesting is the fact that the curve itself sits in different positions for different economies, and it can shift. The Beveridge curve in much of the EU is higher than that in the US, for instance -- for any given level of vacancies, there will be less unemployment in the US.

    This fits a search-and-matching explanation. If the curve shifts outwards, with both vacancies and unemployment rising simultaneously, that is a sign of some kind of structural failure to match: there are potential jobs but for some reason, the match between vacancy and jobseeker is not occurring as quickly as usual. The US is showing signs of this structural stress: vacancies are on the rise but unemployment is falling more slowly than we would expect based on past experience.

    Meanwhile, Germany, whose labour market has been defying the financial crisis, has enjoyed structural gains: unemployment has been falling even when vacancies have not been buoyant. Pissarides credits the delayed effects of Gerhard Schroeder's labour market reforms, with more flexibility and plenty of incentives to match young people with jobs.

    The question, of course, is what feature of Germany's labour market has proved decisive in this -- and what we can transplant into other countries. Even a Nobel laureate was not able to give a convincing answer to that question.

      CNN Business

    • An Iraqi worker adjusts a control valve at the Daura oil refinery on November 5, 2009 in Baghdad, Iraq. Iraq and a grouping of U.S and European oil companies Exxon Mobil Corp and Royal Dutch Shell PLC signed a $50 billion contract today to develop the West Qurna oilfield, two days after the Iraqi South Oil Company signed a technical service contract with Britain's BP and China's CNPC to develop the Rumaila oilfield. The Iraqi government is trying to attract foreign investment, especially in the oil sector, in hopes of reviving its war-torn economy. Iraq has the third largest oil reserve in the world but it is producing way below its potential. (Photo by Muhannad Fala'ah/Getty Images)

      Airstrikes, rebels seizing control of oil fields, plus a severe refugee crisis are a recipe for market panic. So why are Iraq oil prices stable?
    • A view of gloves and boots used by medical staff, drying in the sun, at a center for victims of the Ebola virus in Guekedou, on April 1, 2014. The viral haemorrhagic fever epidemic raging in Guinea is caused by several viruses which have similar symptoms -- the deadliest and most feared of which is Ebola. AFP PHOTO / SEYLLOU (Photo credit should read SEYLLOU/AFP/Getty Images)

      The biggest Ebola outbreak in history is taking its toll in Western Africa, hitting some of West Africa's most vulnerable economies.
    • People enter a casino in Las Vegas, Nevada, on April 18, 2009. Las Vegas is the most populus city in the US state of Nevada and internationally renowned major resort city for gambling, shopping, fine dining and entertainment. Las Vegas which bills itself as the �Entertainment Capital of the World� is famous for the number of casino resorts and associated entertainment. AFP PHOTO/Jewel SAMAD (Photo credit should read JEWEL SAMAD/AFP/Getty Images)

      Macau has overtaken Switzerland in the wealth stakes, being named the world's fourth richest territory by the World Bank.
    • spc marketplace middle east ata atmar a_00010015.jpg

      Saudi Arabian Bateel brand is best known for its delectable dates but it now has more than a dozen cafes and a new bakery in the works.
    • Vantablack designed by Surrey NanoSystems absorbs 99.96% of all light. It however will not be the solution to the creating the world's ultimate slimming black dress! A dress made out of this material would render the curves and contours of the human body invisible and would leave the wearer looking like 'two dimensional cardboard cut-out.'

      A British nanotech company has created what it says is the world's darkest material. It is so dark the human eye can't discern its shape and form.
    • Jibo robot is designed to be an organizer, educator and assist family members. CNN's Maggie Lake met him and says she was impressed with his skills.
    • A picture taken on March 15, 2014 shows children playing at the sprawling desert Zaatari refugee camp in northern Jordan near the border with Syria which provides shelter to around 100,000 Syrian refugees. Syrian refugees in the seven-square-kilometre (2.8-square-mile) Zaatari camp in Jordan fear that President Bashar al-Assad's likely re-election this year will leave their dream of a return home as distant as ever. The brutal war in Syria between the regime and its foes shows no sign of abating and has killed at least 146,000 people since it erupted in mid-March 2011. And 2.5 million Syrians have fled abroad and another 6.5 million have been internally displaced. Jordan is home to more than 500,000 of the refugees.

      Sandwiched in between Iraq and Syria, Jordan's destiny seems to be one of a constant struggle for survival. John Defterios explains.
    • SHEFFIELD, ENGLAND - NOVEMBER 18: Queen Elizabeth II wears 3 D glasses to watch a display and pilot a JCB digger, during a visit to the University of Sheffield Advanced Manufacturing Research centre, on November 18, 2010 in Sheffield, England. (Photo by John Giles - WPA Pool/Getty Images)

      At the last football World Cup, it was all about 3D. This time around, it's nothing less than 4K.
    • An Iraqi worker adjusts a control valve at the Daura oil refinery on November 5, 2009 in Baghdad, Iraq. Iraq and a grouping of U.S and European oil companies Exxon Mobil Corp and Royal Dutch Shell PLC signed a $50 billion contract today to develop the West Qurna oilfield, two days after the Iraqi South Oil Company signed a technical service contract with Britain's BP and China's CNPC to develop the Rumaila oilfield. The Iraqi government is trying to attract foreign investment, especially in the oil sector, in hopes of reviving its war-torn economy. Iraq has the third largest oil reserve in the world but it is producing way below its potential. (Photo by Muhannad Fala'ah/Getty Images)

      Iraq produces 3.3 million barrels per day and has the world's fourth-largest oil reserves. But the current crisis is putting all this in danger.
    • Valves of gas pipe-line are seen in the gas station not far from Kiev on March 4, 2014. The European Union will help Ukraine pay the $2.0 billion it owes to Russian gas giant Gazprom, a top official said Tuesday, as part of an aid package reportedly worth more than one billion euros. AFP PHOTO/ ANDREY SINITSIN (Photo credit should read ANDREY SINITSIN/AFP/Getty Images)

      The gas standoff between Russia and Ukraine could have a knock-on effect on Europe. Explore this map to find out why is the EU nervous.