Nobel Laureates in 2010 on Economics

Matching Theory Nobel Prize Winning Model - 2010 : 

Matching Theory Nobel Prize Winning Model - 2010 Prof. D. Joseph Anbarasu, Bishop Heber College, Tiruchirappalli, India 11/15/2010 1 Dr. D. Joseph Anbarasu

Why Does Unemployment Remains High In Developed Countries? : 

Why Does Unemployment Remains High In Developed Countries? Contributors Peter Diamond, Dale Mortensen and Christopher Pissarides. Justin Lahart and David. Jonathan Cheng. 11/15/2010 Dr. D. Joseph Anbarasu 2

Slide 3: 

11/15/2010 Dr. D. Joseph Anbarasu 3 Dr. Peter A. Diamond, one of the world's leading economists, is an Institute Professor at the Massachusetts Institute of Technology. He modeled how friction works Dale T. Mortensen is the Ida C. Cook Professor of Economics at Northwestern University and the Niels Bohr Visiting Professor of Economics at Aarhus University, a research associate of the National Bureau of Economic Research (NBER), and a research fellow of the Institute for the Study of Labor (IZA). He and Mr. Pissarides, 62, applied the idea to the labor market Prof. Christopher Pissarides, from London School of Economics

Search Theory : 

Search Theory Difficulties buyers and sellers often face in finding each other in the marketplace In the job market, where the buyers and sellers are employers and workers Applied to a host of other topics, from the housing market to the search for a spouse 11/15/2010 Dr. D. Joseph Anbarasu 4

Friction : 

Friction High unemployment can be the result of "friction,“. It keeps employers and workers apart. Friction results Regulatory rules on firing, or The lack of appropriate skills among the unemployed, among other things. 11/15/2010 Dr. D. Joseph Anbarasu 5

Unemployment Insurance : 

Unemployment Insurance More generous benefits give rise to higher unemployment, because workers spend more time looking. It is a benefit to the economy It leads to workers landing jobs that better use their capabilities 11/15/2010 Dr. D. Joseph Anbarasu 6

World Unemployment Rate : 

World Unemployment Rate 11/15/2010 Dr. D. Joseph Anbarasu 7

Overview of Employment Theories : 

Overview of Employment Theories People are without jobs and they have actively looked for work within the past four weeks. The unemployment rate is a measure of the prevalence of unemployment It is calculated as a percentage by dividing the number of unemployed individuals by all individuals currently in the labour force. 11/15/2010 Dr. D. Joseph Anbarasu 8

Classical Unemployment : 

Classical Unemployment Classical unemployment is also known as the real wage unemployment or disequilibrium unemployment. This type of unemployment occurs when trade unions and labor organization bargain for higher wages, which leads to fall in the demand for labor. 11/15/2010 Dr. D. Joseph Anbarasu 9

Cyclical Unemployment : 

Cyclical Unemployment There is a recession. There is a downturn in an economy The aggregate demand for goods and services decreases Demand for labour decreases. At the time of recession, unskilled and surplus labors become unemployed. It is called Keynesian unemployment 11/15/2010 Dr. D. Joseph Anbarasu 10

Marxist unemployment : 

Marxist unemployment According to Karl Marx, Unemployment is inherent within the unstable capitalist system Periodic crises of mass expected. The function of the proletariat within the capitalist system is to provide a "reserve army of labour" that creates downward pressure on wages. This is accomplished by dividing the proletariat into surplus labour (employees) and under-employment (unemployed). This reserve army of labour fight among themselves for scarce jobs at lower and lower wages. 11/15/2010 Dr. D. Joseph Anbarasu 11

Involuntary Unemployment : 

Involuntary Unemployment Voluntarily employed are willing and able to work at any given wage. Some people may be unemployed simply because they are looking for a better job These people are voluntarily unemployed. Involuntary unemployment does not exist in agrarian societies nor is it formally recognized to exist in underdeveloped. 11/15/2010 Dr. D. Joseph Anbarasu 12

Full Employment : 

Full Employment Full employment is a condition of the national economy All persons willing and able to work at the prevailing wages and working conditions are able to do so. It is defined either as 0% unemployment, literally, no unemployment , as by James Tobin, or As the level of employment rates when there is no cyclical unemployment. It is defined by the majority of mainstream economists as being an acceptable level of natural unemployment above 0%, the discrepancy from 0% being due to non-cyclical types of unemployment. 11/15/2010 Dr. D. Joseph Anbarasu 13

Full Employment : 

Full Employment The specific level of unemployment that exists in an economy that does not cause inflation to increase. The non-accelerating rate of unemployment (NAIRU) often represents an equilibrium between the state of the economy and the labour market. NAIRU is also sometimes referred as a "long-run Phillips curve". For example, suppose that the unemployment rate is at 5% and the inflation rate is 2%. Assuming that both of these values remain the same for a period of years, it can be said that when unemployment is under 5%, it is natural for an inflation rate of 2% to correspond with it. 11/15/2010 Dr. D. Joseph Anbarasu 14

Structural unemployment : 

Structural unemployment It occurs due to the structural changes within an economy. This occurs when there is a mismatch of skilled workers in the labour market. Some of the causes of the structural unemployment are geographical immobility (difficulty in moving to a new work location), occupational immobility (difficulty in learning a new skill) and technological change (introduction of new techniques and technologies that need less labour force). Structural unemployment depends on the growth rate of an economy and also on the structure of an industry. 11/15/2010 Dr. D. Joseph Anbarasu 15

Frictional unemployment : 

Frictional unemployment Frictional unemployment is a temporary condition. It occurs when an individual is out of his current job and looking for another job. The time period of shifting between two jobs is known as frictional unemployment. The probability of getting a job is high in a developed economy This lowers the probability of frictional unemployment. There are employment insurance programs to tide over frictional unemployment 11/15/2010 Dr. D. Joseph Anbarasu 16

Beveridge curve : 

Beveridge curve The frictions in the labour market are sometimes illustrated graphically with a Beveridge curve, a downward-sloping, convex curve. It shows a correlation between the unemployment rate on one axis and the vacancy rate on the other. 11/15/2010 Dr. D. Joseph Anbarasu 17

The Beveridge Curve can move for the following reasons : 

The Beveridge Curve can move for the following reasons The matching process will determine how efficiently workers find new jobs. Labour force participation rate; as the number looking for jobs increases relative to total population, the unemployment rate increases, shifting the curve outwards from the origin. Long-term unemployment will push the curve outward from the origin. This could be caused by; deterioration of human capital or a negative perception of the unemployed by the potential employers. Frictional unemployment; a decrease in frictions would reduce the number of firms searching for employees and the number of unemployed searching for jobs. This would shift the curve towards the origin. Frictional unemployment is due to job losses, resignations and job creation. 11/15/2010 Dr. D. Joseph Anbarasu 18

Matching theory (macroeconomics)- Matching function : 

Matching theory (macroeconomics)- Matching function A matching function is a mathematical relationship that describes the formation of new relationships from unmatched agents of the appropriate types. For example, in the context of job formation, matching functions are sometimes assumed to have the following 'Cobb-Douglas' form: 11/15/2010 Dr. D. Joseph Anbarasu 19

Matching function : 

Matching function A matching function is in general analogous to a production function. A production function usually represents the production of goods and services from inputs like labour and capital, A matching function represents the formation of new relationships from the pools of available unmatched individuals. Estimates of the labor market matching function suggest that it has constant returns to scale = a+b ≈1 11/15/2010 Dr. D. Joseph Anbarasu 20

Matching function : 

Matching function If the fraction of jobs that separate (due to firing, quits, and so forth) from one period to the next is d , then to calculate the change in employment from one period to the next we must add the formation of new matches and subtract off the separation of old matches. A period may be treated as a week, a month, a quarter, or some other convenient period of time, depending on the data under consideration. 11/15/2010 Dr. D. Joseph Anbarasu 21

Matching function : 

Matching function 11/15/2010 Dr. D. Joseph Anbarasu 22

Applications : 

Applications Matching theory has been applied in many economic contexts, including: Formation of jobs, from unemployed workers and vacancies opened by firms Formation of marriages, from unmatched individuals Allocation of loans from banks to entrepreneurs The role of money in facilitating sales when sellers and buyers meet 11/15/2010 Dr. D. Joseph Anbarasu 23

References : 

References References of WIKI endorsed Pissarides, Christopher (2000), Equilibrium Unemployment Theory, 2nd ed. MIT Press Economic Prize Committee of the Royal Swedish Academy of Sciences, 'Scientific Background', page 2. Barbara Petrongolo and Christopher Pissarides (2001), 'Looking into the black box: a survey of the matching function'. Journal of Economic Literature 39 (2), pp. 390-431. Dale Mortensen and Christopher Pissarides (1994), 'Job creation and job destruction in the theory of unemployment.' Review of Economic Studies 61, pp. 397-415. Wouter den Haan, Gray Ramey, and Joel Watson (2003), 'Liquidity flows and the fragility of business enterprises', Journal of Monetary Economics 50 (6), pp. 1215-41. Nobuhiro Kiyotaki and Randall Wright (1993), 'A search-theoretic approach to monetary economics'. American Economic Review 83 (1), pp. 63-77. Robert Shimer (2005), 'The cyclical behavior of equilibrium unemployment and vacancies'. American Economic Review 95 (1), pp. 25-49. 11/15/2010 Dr. D. Joseph Anbarasu 24