Lumpy markets & mental models

How lumpy is the labour market? Several recent posts prompt me to ask.

Here's what I mean. Think of two possible extreme mental models of the labour market. At one extreme, the market is flat, and workers are easily substitutable between jobs. At the other extreme, the market is lumpy with each job and each worker being different, and so workers are not substitutable. These markets differ in some important ways.

First, if the market is flat, then John Quiggin is right to say that the internet should have reduced unemployment because it greatly reduces the cost of searching for jobs or workers and so facilitates more matches between them.

However, if the market is lumpy, this isn't necessarily the case. If you're looking for very particular worker (or job) then we're in Nick's world. Where there's lots of heterogeneity, he says, "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." His analogy to the car market is good: there are thousands of used cars, but the market for a precise type of Mazda MX6 near Ottawa could be thin.

Secondly, in a lumpy market, we might see shifts in the Beveridge curve as mismatches betweenworkers and vacancies increase and decrease. In a flat market, by contrast, we'd see shifts along the curve in response to changes in aggregate demand.

Thirdly, in a lumpy market wages and profits depend upon bargaining over how to divide the surplus that results from the match between specific workers and jobs. The division of this surplus will depend upon individual bargaining power. This means there might be many employers who have some monopsony power by virtue of being (near-) sole offerers of some specific jobs. And this justifies minimum wage laws or the exercise of union power - because as Mike says, in the presence of monopsonies, higher wages don't necessarily destry jobs.

Fourthly, in a lumpy market efficiency requires investment in job-specific skills, because each job is different. In such a world, Jackart's advice to workers - if you don't like pay and conditions, leave - becomes inefficient as leaving would break efficient matches.

What's more, workers with an eye on the exit would be deterred from investing in job-specific skills. Take, for example, me at the Investors Chronicle. If I feared for my job, I'd write lots of articles on economics of the sort that would appeal to future employers: pieces of macroeconomic futurology that praised or blamed Osborne. But the IC wants something more specific - pieces that are helpful for individual investors. Job security encourages me to do this, and to develop job-specific skills to the benefit of my employer.

In this context, trades unions and employment protection laws aren't labour market frictions, but are in fact productivity-enhancing, as they encourage job-specific investments.

Finally, in a lumpy market, workers are imperfect substitutes for each other: for example, Aditya Chakrabortty and I are both economics writers, but because of job specificity were are hardly competitors. This means that an excess supply or demand for workers will have little impact on wages. This is one reason why immigration does not depress wages, except at the very bottom end of the market - it's because immigrants aren't substitutes for native workers.  

So, is the labour market flat or lumpy? The answer of course is: a bit of both. On the one hand, the Beveridge curve does slope down, which alone is evidence for John's claim for the superiority of simple aggregate demand models over search models and for flatness over lumpiness. But on the other, the relationship between vacancies and unemployment isn't a 100% fit; unemployment now is higher that the number of vacancies would suggest. That's evidence that, as Noah says, aggregate demand isn't the whole story. And of course, casual empiricism tells us that workers aren't perfectly substitutable; I'm better at writing for the IC than the Guardian, and better at both than heart surgery.

My point here is twofold. First, simple mental models don't map perfectly onto a messy world - which is why simple arguments against immigration, minimum wages or employment protection laws fail.

Secondly, the degree of lumpiness in the labour market can change all the time depending upon the nature of technical change and creative destruction. In this sense, the old warning about economic models - that the map isn't the terrain - actually understates the case: the terrain can change whilst the map doesn't.

Comments

[Luis Enrique]

might it be the case that the internet has increased search efficiency in sectors of the labour market where unemployment is already low? Such as the market for highly educated workers.

Where is unemployment high? I am guessing it is higher for the less educated, and also in certain locations (i.e not London). In these locations, the market is lumpy in the sense that most people are probably not footloose professionals but are looking for local jobs - few would want to relocate the family for a dreary minimum wage job. In this part of the job market, how much of a difference does the internet make? 10 years ago you had the job centre and local newspaper, these are quite efficient already if you want a local job picking and packing in a warehouse, for example.

If the increase in matching efficiency has been small, we shouldn't expect much of a change in unemployment.

fwiw my guess is that matching frictions account for some unemployment, and I think search models are useful especially as they can incorporate firm and worker heterogeneity, but a combination of lack of local demand suited to nature of local unemployed, plus perhaps some fundamental mismatch between supply and demand for unskilled workers, explains unemployment. Afaik, search models haven't got very far at including industry-wide demand, for example.

[Ralph Musgrave]

Strikes me Chris is out by 180 degrees: isn't it precisely lumpy markets that would gain from the internet and computers?

If the market is ultra-flat then anyone can apply for any job at any employer, and assuming the latter has a vacancy, the applicant will be hired. No internet or computers needed there.

In contrast, and given extreme lumpiness, there might be only one job suitable for a given applicant within ten miles of where they live. In that scenario, the internet really comes into its own. Once the applicant has entered their qualifications etc into the system, a computer can look thru five thousand vacancies entered by employers within the space of a second and find a match, if there is one.

[Luke]

Ralph, I'm not sure that "lumpiness" is just a matter of both parties knowing (or not knowing) that there's a vacancy for a person with X skills in Y location.

Take professional football. Hundreds of "candidates" (ie players) demonstrate their skills/weaknesses every week on television and in front of crowds of thousands. And "employers" (teams) publicly demonstrate their vacancies by letting in/not scoring goals. But teams often find it difficult to fill particular positions or fill them unsuccessfully or get stuck with players they no longer need. And at the same time players find themselves sitting on the sidelines not getting a game.

[An Alien Visitor]

Are there many jobs that go unfilled for a long period of time because the suitable candidate hasn't applied? But in a flat market would this be the case? You would need to know this figure wouldn't you?

So would actual unemployment really change that much or just the statistical anomaly?

[Nick Rowe]

Thanks Chris. A Coupla points:

1. If the labour market were perfectly flat, the Beveridge Curve would be L-shaped, along the axes. We would observe either positive vacancies and 0% unemployed, or else 0 vacancies and positive employment.

2. If it's lumpy, there is bilateral monopoly/monopsony power. The seller of my ideal MX6 had monopoly power over me, because I had no close substitue sellers, but I had monopsony power over him, because he had no close substitute buyers (the other buyers wanted something a little different, so weren't prepared to pay as much as I was). It's not obvious whether we should put either a minimum price or a maximum price on used cars.

[Nick Rowe]

Damn typo! Should read: "We would observe either positive vacancies and 0% unemployed, or else 0 vacancies and positive unemployment."

[Dave Timoney]

The Internet (i.e. online job sites) does not provide an accurate representation of the jobs market. Most job ads are placed by recruitment agencies, not by employers, and most of them are CV bait rather than real jobs. If the Internet was going to improve job search and matching, it would have disintermediated recruitment agencies by now.

The challenge agencies faced with the arrival of the Internet was that advertising was no longer expensive. Previously, large agencies could dominate the page advertising in newspapers and specialist mags, keeping small competitors out through high prices.

With low costs for online ads, they could only preserve their dominant position (in terms of hoovering up candidates coming onto the market) by massively increasing the number of adverts they placed.

The global coverage of the Internet also resulted in the growth of CV spam (unqualified candidates applying for everything because email is cheaper than photocopies and stamps). This proved to be a good thing for agencies as they justify their fees in part by "screening" these out. The more noise, the better.

In other words, the increased efficiency of search has been offset by the massive degradation of the (virtual) database.

[Thornton Hall]

Imagine two people in uncertain terrain. The first has no map. So he watches where he steps.

The second has two maps, on from MIT and one from UofC. He starts off with the UofC map. As he is falling to his death off a cliff unmarked on the UofC map, does having the correct map in his pocket make him better or worse off than guy one who never had a map in the first place?

[theOnlySanePersonOnPlanetEarth]

"As he is falling to his death off a cliff unmarked on the UofC map, does having the correct map in his pocket make him better or worse off than guy one who never had a map in the first place?"

A map should be a tool to aid you, but please, if you see a cliff in front of you stop! Don't think, I can see the cliff but the map doesn't say it should be here so I will go with the map!

But assuming he does go with the map, it depends on whether the other guy without a map is falling to his death whether he feels better or worse than him!

[Keith]

How does the Interweb affect mr rich guy giving his stupid son a job as an act of nepotism? I suspect it has no effect. If you are clever and poor Mr rich guy is still going to give his son the gig,not you however many CVs you send out to him, just as Cameron likes IDS as he is a reactionary moron. A perfect surrogate son.

Middle class people tend to have a career for which they are prepared usually with a lot of help from dad and mom and private education. Not all children like the path chosen for them by their families but most put up with it.

Working class people and those middle class ones with bad unhelpful parents or with a rebellious streak cannot get or do not want a career and must put up with a job to make money. But jobs are often hard to get especially if mr rich guy gives them to his stupid son as blood is thicker than water.

[Thornton Hall]

@theOnlySanePersonOnPlanetEarth

About 75% of Krugman's output consists of calls for policy makers to look up from the map and use their own judgement. But I think we have to take policy makers as they come (a thought beyond the pale?) and recognize that if you hand them maps, they will follow them. All the pleading from the good guys of macro will not solve this problem. Until Econ realizes this and declares all maps invalid, folks like Cochrane and Mankiw will generate maps that serve the interests of rich people and lead the rest of us off a cliff. With the good guys of macro insisting all the while that if only the policy makers had looked up.