The Elephant in the Room

The 2010 Nobel Prize winners in economics deserve credit for their efforts to reconcile theory with reality.

Since 1991, the reform mantra for India’s ‘rigid’ labour market has been simple: to make them hire, let them fire. A policy that doesn’t let companies sack workers freely, goes the logic, also keeps them from expanding payrolls freely. Instead, what reformers want is dynamism, with market forces—those angelic balancers of demand and supply—shuffling people around to jobs that make the most of what they can do.

The thing is, it has been tried, and it doesn’t work. Finding jobs is tough. It takes time and money. That 2010’s Nobel Prize in Economics should be awarded for this insight would strike anyone as crazy, but grant Peter Diamond of MIT, Dale Mortensen of Northwestern University and Chris Pissarides of LSE, this year’s joint awardees, credit for their efforts in using that obvious little hitch to reconcile theory with reality.

They have been awarded for their work in ‘search theory’. This field of study was opened up in the 1960s by George Stigler, who said that you keep looking until your cost-of-search begins to exceed your expected gain from any further effort.

Diamond’s analysis of the implications led him to a firm belief in an out-of-work dole to ease overall unemployment (not to be confused with welfarism for its own sake). Unlike information, which, Google-willing, can be instantly matched and supplied to infinite searchers (in theory), jobs are finite and slow to fill appropriately. So the clog-up of applicants would be eased if some of them are ready to wait it out—on dole—for a better deal.
But too much dole money tends to dull the jobseeker’s ‘search intensity’. Mortensen and Pissarides put their knuckles to chins and worked out how this intensity (and associated pickiness—a rigidity—about jobs on offer) relates to such variables as jobseekers’ dole comfort and employers’ readiness to recruit.

At a policy level, their work helps assess the extent of unemployment benefits that would work best for an economy. At a theoretical level, it helps one make sense of the paradox America now suffers: high joblessness, despite plentiful job openings.

There are enough jobs to go around, but alas, ‘search frictions’ get in the way.

Perhaps India would happily trade rigidities with America, though. Let’s face it, the real rigidity of the Indian jobs market can be traced to something few dare discuss openly—caste.

An unstated social presumption, that is, of genetically endowed aptitudes. That’s the real problem, and if reform the Indian jobs market we must, that’s the thing to address.

About The Author

Aresh Shirali