Nobel laureates: unemployment benefits increase unemployment (for now)

This year's Nobel winners looked at the mismatch between job seekers and job openings. Too many modelers don't.

By , Guest blogger

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    In this photo taken Sept. 29, 2010, a job seeker waits, resumes in hand, to speak to recruiters at a job fair in Livonia, Mich. This year's Nobel Prize winners in economics argue that unemployment benefits allow job seekers to hold out for 'good fit' job openings. It extends unemployment in the short run, but results in better, longer-term employment in the long run.
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This year's winners of the Nobel price in Economics, Peter Diamond, Dale Mortensen and Christoper Pissarides, are relatively sensible. The point of their theories is that in many markets we can experience simultaneous shortages and surpluses, because some buyers and sellers have a difficult time finding each other. One example of this is the labor market, where so-called "frictional unemployment" in the form of many jobs openings remaing vacant even as there are many unemployed willing and able to perform them, because jobseekers and employers are unaware of or don't realize that they could solve each other's problems.

Some would belittle these insights as being trivial, but that overlooks that many economic models in fact overlooks these insights. One example of this is the Classical models that assume that wage adjustments are sufficient to eliminate unemployment, or Keynesian models that assumes that increased "aggregate demand" can solve unemployment.

It should further be noted that the laurates note that more generous unemployment benefits will increase "frictional unemployment" as the unemployed will put less effort into finding a new job. That means that more generous unemployment benefits will increase unemployment even if wages are completely rigid. And it also means that even in a recession, as long as there are any job openings, increased unemployment benefits will increase unemployment.

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