Peter Diamond On The Slow Recovery Of Employment

I have just returned from the Eastern Economic Association meetings held in Boston over the weekend. Peter Diamond delivered the main plenary lecture on Saturday evening (2/10/12) on "Markets with Search Frictions." While I disagree with some things he said (He thinks the "natural rate" equals "NAIRU" [and that these are both meaningful concepts], and as always wants to "fix" social security, but these were not his main topics), he mostly gave a wise and knowledgeable presentation about the search model of unemployment, going back into its routes and noting many of its limitations and problems, as well as how it is useful, reminding everyone in the audience what fools those in the Senate are who think he is not qualified to serve on the Board of Governors of the Fed.

One general point he made that I had not really thought about, although once pointed out it is obvious, is that labor markets are seriously different from textbook supply and demand models in that there is never a really clearcut equilibrium. There are always vacancies, hence some "excess demand," and some official unemployoment, hence some "excess supply." All the imposed definitions of labor market equilibrium are thus arbitrary.

The most interesting remark to me came in reply to a question from the audience. He had stated in his main talk that "the matching mechanism has broken down during the recent recession." He was asked to elaborate. Drawing on research by Davis, Haltiwanger, and others, he broke it down to the micro sectoral level, although saying that more is going on than just that. But at that level, different sectors have different hiring rates. The one with the most rapid hiring rates is the one with the least hiring, construction. Some with slow hiring rates include education, health, and government. Not all of those latter are growing that much, but health is certainly one of the most rapidly growing. So, quite aside from broader macro issues (including possibly reduced mobility from underwater mortgages, although some studies claim this is not a factor), this sectoral pattern of how the recession has hit has slowed down the hiring/rehiring portion of the matching mechanism.

Outgoing president, Duncan Foley, also gave an excellent talk on physical limits to growth related to climate and energy, but, I shall not comment on that at length here and now (title, "Dilemmas of Economic Growth"), other than to say I largely agreed with it and he showed some very interesting statistics on various things that I had not seen before.