What is the competing theory to ‘search’?

The Nobel prize in economics was awarded to Peter Diamond, Dale Mortensen and Chris Pissarides for their contributions to the search theory of labor market inefficiencies — most notably, involuntary unemployment. This is the set of work that stands in the accepted middle of the Real Business Cycle and Keynesian macro divide. Consequently, the prize upset few. Search theory falls into the economic world of what is modelable. It is tractible, assumptions are laid bare and implications can be drawn from it. But what alternative theory should we compare it to?

Now I don’t think that alternative theory should be frictionless markets. That’s plain stupid and, at best, an intellectual exercise. The better alternative theory is that of social ties. What explains how employers and employees find each other. Search theory says it is effort to avoiding missing each one another in the dark. It is the jobs equivalent of match.com. But sociologists, in particular, Mark Granovetter, emphasise who you know; especially, who your friends know.

Chances are, for some professions, it is pure search but if you think about it, for many others, it is the social network that matters. Sadly, for economics, that latter path has received scant formal attention and very little impact on macroeconomic modeling.

Andrew Leigh has a new book, Disconnected, on these issues. [Sadly, being in the US, I can’t get it and it is not available electronically (thank you UNSW press for disconnecting that market!). And, of course, no one sends mere bloggers review copies.] Anyhow, if you are like me, you can get the gist from Andrew’s opinion piece in the AFR today; probably penned prior to the Nobel announcement but I’m sure Andrew will get to a comparison in due course. For another perspective, see this recent piece by Malcolm Gladwell and this piece by Tim Harford.

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