Why is there unemployment when jobs are available?

Anyone who’s ever looked for a job would agree that it’s a time-consuming process. You search through job ads, prepare applications and send them out. And then the waiting game begins. Maybe, you’ll get an interview. After that, there’s more waiting, and likely more interview rounds. Meanwhile, on the other side, employers go through a similar search process to find that one candidate who’s a perfect fit. It seems that unemployment and job vacancies co-exist in almost every economy.

This may seem obvious to us today - but that’s only thanks to a certain young Cypriot-born economist called Christopher Pissarides. He came to England in the 1970s and turned our understanding of labor markets on its head. Stemming from his childhood fascination with the work of the people around him, and a deep social awareness of the late 60s, Pissarides undertook an independent study of unemployment. His work offered up a model of radically new frameworks for understanding the classical labor market.

Sir Christopher Pissarides

Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel (shared), 2010

At a glance

Born: 1948, Nicosia, Cyprus

Field: Labor economics

Prize-winning work: Analysis of markets with search frictions

Favorite books: Biographies, mostly of successful people

Superpower: Can tell a river stone from a sea stone

Made history: By being the only person at LSE who was denied a promotion twice

Architectural contribution to LSE: Successfully advocated building a bridge to connect the faculty of economics with the research center

Life credo: "I never give up!"

Matchmaking is all about human connections

"The fascination I always had with the economy was focused on the labor market, because that’s where people interact. In fact, this interaction is not only the pure economic interaction that you go in there to produce, get an income and leave, but more about how well-connected people are in the labor market, how well-matched they are," Pissarides explains cheerfully. "So I was trying to break away as much as possible from the very cold way that economists would look at work, but at the same time do it by keeping existing principles of economic modeling. How far can these principles that started with Adam Smith about 250 years ago - and developed over the centuries - take us? They can explain some things, they can get some things wrong."

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The work, for which the Nobel Committee awarded Pissarides the Prize in 2010, bridges precisely this gap by merging the classical market model with the search function. It takes the supply and demand sides of classical economics up to the point where they help explain how labor markets function. Aptly, the research incorporates features from Pissarides’ search theory, where potential partners search for each other - just like on dating or property websites - prior to an interaction.

In a nutshell, what Pissarides did was to add a third equation - the matching equation - to the existing ones from the model of the labor market. This turned out to be a big deal, and went on to determine much of future research and policymaking around labor, housing, loan allocation and other markets' economic activity that requires matchmaking.

The beauty of mathematics

As he takes us on a journey back to his childhood in Cyprus, Pissarides’ ways of relating to the world around him slowly reveal themselves. He recalls being mesmerized by modest and elegant embroidery patterns on handkerchiefs handmade by Cypriot women. The young future Nobel Laureate had been fascinated by the process of transformation through work; from these women taking simple silk thread to coming back to his father's clothing store with the finished product. From raw materials, the worker not only creates another object, but also gives it value through the act of their production.

It’s not surprising to hear Pissarides speak in a similar fashion about math, where something concrete arises out of an initial distancing from the subject: "It’s more the abstraction and the beauty of it and the way it produces results quickly. You get an equation, you solve it and here it is. In a way, it’s like a language but something much more tangible." Indeed, he takes the elegance and simplicity of mathematical modeling as a path to solving essential social problems.

The drive to understand unemployment

In Pissarides’ first years in the UK, long before he was knighted by the Queen or won the Nobel Prize, he witnessed unemployment and was determined to get a better understanding of it. His research introduced the value of the unemployed worker.

When I realized there were people who wanted jobs but couldn’t get them even though companies were hiring, it became obvious there was a great lack of understanding of the problem and what could be done about it.

The value of an unemployed worker

The value of an unemployed worker as a potential earner on the labor market in exchange for their skills - and therefore a stagnant source of economic activity - ignited both compassion and curiosity in the Cypriot economist. This notion has radically advanced our understanding of a (mal)function in the labor market and has helped revise policy recommendations.

As he studied more, a social awareness awoke in him that spurred his curiosity; a drive that urged him to find a solution. During the years of Margaret Thatcher’s government in the UK, Pissarides saw unemployment soar. "Some of the market reforms served Britain well," he says. "But I would have done things differently." Firstly, these reforms would have been implemented much more gradually. Secondly, he would have drawn up policies in collaboration with worker representatives, and thirdly, workers struck by reforms wouldn’t have been left out in the cold.

Shortly after the announcement of his Nobel recognition, the chance to influence policy became abundant for Pissarides. He advised the Cypriot government as well as the European Council. However, this honor didn’t come without its challenges. "When you advise a politician, you should never expect them to do as you say," he says. "It would be extremely frustrating. The best you can hope for when you’re advising politicians is that they listen." Partner in life and work Rachel Ngai reveals: "Until the Prize, he had never had the feeling that people were taking him seriously." She says he’s always been a true academic, doing his own research regardless of recognition.

The hope that something he says might sink in and influence decisions and policies is what keeps Pissarides going. Moreover, it’s his inability to stand by idly when he knows what needs to be done. "I wouldn’t give up only because someone isn’t listening. Carry on and - who knows? - one day they might listen."

It is precisely this principle of not giving up and not standing aside that drove Pissarides to take action in the Eurozone crisis. With his deep interest in both the European project and unemployment, he took to lecturing, publishing and campaigning to educate Greece and Cyprus. This was after 2008, when the average unemployment was approaching 30% and half of recent graduates couldn’t enter the job market at all.

How can we solve the crisis in Greece?

"If you look back to what kind of policies brought this market failure and the rise in unemployment, they are not too different from what we had in the Great Depression," the economist explains, standing on the shoulders of John Maynard Keynes regarding government investment policy. "The other reason was the high debt level, the institutions that could provide funding for Greece to carry on with its economic policies, insisted on wage, pension and spending cuts by the government that effectively reduced the level of demand in the economy."

Neoclassical economists suggested that cutting wages would reduce labor cost and make the country more attractive as a producer of cheap exports. "We saw that it didn’t work. One of the reasons is that the export sector in Greece is not that big. Tourism is very big and it's always the example used: If the Greek tourist product becomes so much cheaper because now you don’t have to pay a lot of money to Greek tavern or hotel owners, a lot more tourists will go to Greece. But in fact, that didn’t work. Even if you increase numbers, it’s a small sector of the economy, it’s not big enough to lift the whole economy up."

Even in this seemingly difficult case, Pissarides maintains a positive, solution-prone attitude.

I do believe that if in the Eurozone we are true partners and it is a real partnership, then other Eurozone countries, led by Germany, should be investing in Greece today because there is a very big prospect on investments to be taken advantage of.

Pissarides’ unbreakable optimism has carried him through most of his life. As a 17-year-old who came to study in London, he quickly noticed that the environment in a new country is prone to change, and with time something that feels difficult becomes manageable and eventually even enjoyable. "I never give up! I would never give up on anything that I start, whatever the difficulties. But I will do it in my own way." He sums up his own experience in the form of advice.

Things change, and if you know they change, you shouldn't give up. They change for the better, if you know how to use them.

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What does Pissarides’ work mean for us?

"The truth is getting a job or hiring a worker isn’t a transaction like buying or selling apples, it’s more like finding a boyfriend or girlfriend, neither the employer nor the job seeker are willing to settle for just anyone, they both want someone who fits their needs."

Tim Harford
Financial Times columnist and author of
The Undercover Economist

“The orthodox approach treated labor like any other commodity that could be bought and sold at a market price. Anyone working in the financial sector knows this to be absurd.”

Paul Donovan
Global Chief Economist
UBS Wealth Management

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