Jobs are like marriages, says Lucy Kellaway. This is not just a nice point about lifestyle. It’s a great insight into economics. So great, in fact, that Chris Pissarides and Dale Mortensen won a Nobel prize for pointing it out. Employment, they said, requires that there be good matches between workers and employers, just as marriages require good matches between husbands and wives. A well-functioning labour market is one in which many good matches are made, an ill-functioning one in which matches aren’t made or fail.
For example, young people are more likely to flit from job to job and have higher unemployment than are older folk, and are also more likely to change partners or be single. In both cases, the reason is the same – they are looking for “the one”, the right job or right partner.
Similarly, theories of voluntary unemployment are stories about a failure of matching. Just as a man is likely to be single if he wants to marry Rachel Riley but his attributes better match him with Lisa Riley, so he is likely to be unemployed if his reservation wage is too high or his area of job search too limited.
We can, then, reframe the question: what’s going to happen to employment? We should ask: will the number of happy matches rise or fall?
In the US, there’s a reason to expect more matches, and hence a fall in unemployment. One reason why unemployment has been stubbornly high during the recovery lies not just in the weakness of aggregate demand – important though that is – but in an increased mismatch between workers and vacancies. Just as they’ll be lots of singletons if men want to marry blondes but only brunettes are available, so there’ll be high unemployment if firms want to hire IT workers when builders are plentiful. However, this mismatch is quite common early in recoveries – because recessions shake up the patterns of supply and demand – but it tends to decline over time, with the result that unemployment falls.
Better still, when buyers are better matched with sellers, there’s no reason for prices to rise – and they might even fall. A drop in unemployment due to better matching is therefore often associated with falling inflation. And this combination is usually great for equities.
You don’t have to look far for a precedent for such an improvement in matching. It’s just what has happened in the UK recently. Since the end of 2010, the number of vacancies in the economy has fallen only very slightly, but unemployment has dropped by almost 300,000. Such a big fall in unemployment accompanied by barely any change in vacancies is a sign that workers are being better matched to the available jobs.
Whether this can last is, however, questionable. Just as people sometimes stay in unhappy marriages in the hope of turning things around, so employers sometimes retain workers who are unprofitable to employ in the hope of a turnaround; this is labour hoarding. It’s possible that in the next few months output will grow but employment won’t, as some firms – disappointed at being unable to turn their firms around – “divorce” their workers. Unless the recent stagnation in productivity is permanent, this will happen to at least some degree.
The point here, though, is not idle futurology. It’s that the analogy between marriages and jobs is a close one, as both are matches. Thinking about jobs along these lines is fruitful, whether we are considering employment policy, the macroeconomic outlook or one’s own hiring or employment decisions.
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Chris blogs at http://stumblingandmumbling.typepad.com