My Opinion of Labor Search Theory

Nick Rowe writes,

“search” theory should really be called “search/matching” theory. Because without heterogeneity of workers and jobs the search problem would be trivially easy. “You want a job?” “Yes. You want a worker?” “Yes.” “Done!”. And “search/matching” theory should really be called “wait/matching” theory. Because even if both sides of the labour market have perfect information about the other side — about who’s looking for a job and who’s looking for a worker — there might not be any suitable matches on the market right now, and one or other side might choose to wait until a better match appears on the market.

The big problem with search theory is that it assumes that jobs are given. The PSST story is that in order to create a job, you need to discover some sustainable pattern of comparative advantage.

I do not put much stock in the story of unemployment workers wandering around, lost, unable to find the jobs that are sitting out there. I put my emphasis on a story of entrepreneurs trying to figure out what sorts of profitable business enterprises can be assembled using the resources available, including the stock of unemployed workers. Nowadays, it’s hard to put together profitable enterprises with low-skilled workers, because you have to cover payroll taxes and health care costs, provide enough take-home pay to make it worth their while to forego government benefits, and compete with other businesses that can hold down costs through automation and/or outsourcing.

4 thoughts on “My Opinion of Labor Search Theory

  1. Arnold: OK. But couldn’t we see that as multi-sided search? Where you need a team of people (workers, customers, suppliers of parts) to make a match. And the entrepreneur is the matchmaker, who takes the lead role in putting the team together. Take a model of the marriage market. Now assume there are three sexes, and you need 3 people to make a match.

    • Yeah, but I think part of Dr. Kling’s point is that you can put different workers together in different combinations. He’s previously used the analogy of several unemployed singers, for each of whom there is no customer demand. Then, an entrepreneur forms them into a barber-shop quartet.

  2. Your final sentence succinctly summarizes why I favor a universal cash benefit to replace all welfare & entitlement programs. I believe technological progress is creating a growing group of people that are effectively unemployable at what the left likes to call a “living wage.” It does no good to tell them get a job or to offer training. The innate ability just isn’t there to create enough value to justify a $25k annual wage plus all the mandatory benefits and taxes.

    It’s also why I believe an increase in the minimum wage is the absolute worst thing we can do for those trapped in this situation. It only raises the bar that much higher for those, especially youngsters, on the margin who might be able to climb out given the right stepping stone opportunities.

  3. I’ve modeled entrepreneurs searching for profitable opportunities using the multi-armed bandit problem. The challenge is that you don’t know the payoff when you pull the lever, so you expect to have to pull a bunch of levers to find a winner.

    Therefore, I see the issue with extra overhead imposed by the government as decreasing the number of experiments that can be run to discover new PSST. This framework magnifies any friction. Because it inhibits discoveries that other people can copy.

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