Why Are There Vacancies and Unemployed People at the Same Time? Matching Takes Work

The elementary account treats labour as a market where a wage adjusts until the quantity offered equals the quantity wanted, which predicts that persistent unemployment alongside persistent vacancies should not occur. It occurs everywhere and always. The reason is that workers and jobs are not interchangeable units, so a vacancy and an unemployed person do not automatically fit each other, and discovering whether they do takes time, effort and money on both sides. Employers must advertise, sift, interview and assess. Workers must search, apply, travel and evaluate. That process is costly, takes time and frequently fails, so at any moment a stock of unmatched jobs and unmatched people coexists, which is not a malfunction but the normal operation of a market with search costs.

Several distinct obstacles slow matching and each suggests a different remedy:

• •Information, since neither side knows what the other is offering or is like
• •Skills, where what employers need and what workers have differ
• •Geography, where jobs and workers are in different places and moving is expensive
• •Timing, since vacancies and job losses do not coincide
• •Screening costs, since assessing a candidate is expensive and imperfect
• •Reservation wages, since a worker with some income will not accept any offer

Economists built models in which matching itself is the central process rather than an assumption. A matching function relates the number of new hires to the numbers of vacancies and searchers, which is estimated empirically and behaves consistently across economies. The relationship between unemployment and vacancies, plotted as a curve, describes how efficiently an economy matches, and shifts in that curve indicate that matching itself has become harder or easier rather than that demand has changed, which is a distinction policy needs. Wages in such models are bargained between a matched pair sharing the surplus their match creates rather than set by a market. The work developing this framework received a Nobel Prize in 2010.

Economists distinguish several kinds and the distinction determines what would help. Frictional unemployment is people between jobs while matching happens, which exists in any functioning economy and is not a problem in itself. Structural unemployment arises where the available jobs and the available workers differ in skill or in location persistently, which training and mobility address and demand does not. Cyclical unemployment arises when total demand falls short and firms need fewer workers of every kind, which demand management addresses and training does not. Seasonal unemployment follows predictable annual patterns. Real episodes mix these, and the practical difficulty is that they are hard to distinguish at the time, since the same measured rate can arise from different causes needing opposite responses.

Treating unemployment as a matching problem changes which interventions make sense. Measures reducing search costs, including public employment services, job matching platforms and support for travel, address the friction directly. Training addresses skills mismatch and works where the mismatch is the binding constraint and not otherwise. Housing policy affects geographic mobility substantially, since expensive housing where the jobs are prevents people moving to them. Unemployment benefits have two effects that must be weighed, since they allow a longer search that may produce a better match and also raise the wage somebody will accept, and the evidence suggests both effects are real and modest. And none of it helps when the problem is a shortage of demand rather than of matching.

Workers and jobs are not interchangeable, so discovering whether a particular pair fits costs time and money, which is why unfilled vacancies and unemployed people coexist permanently. Information, skills, geography and timing are the distinct frictions. Models treating matching as the central process, rather than assuming a market clears, received a Nobel Prize in 2010.