Modeling a Major — Yet Hidden — Shift in the U.S. Labor Market
The 2008 global financial crisis and subsequent recovery has shaped so much of the policy impact and political decisions over the 15 years. It’s also created the conditions that Associate Professor of Economics Tristan Potter, PhD, has been observing as he’s established his career as an economist.
In his recent paper “Destabilizing Search Technology,” published in the Journal of Monetary Economics, Potter attempts to quantify how modern job search technologies influenced individuals’ job-search decisions and, by extension, the US labor market.
Underpinning Potter’s study is a “microfounded model” — modeling an entire economy, all the way down to individual behaviors and decisions. “In this model, you add up all those decisions up and see how they collectively impact things like the unemployment rate,” he says.
Potter’s model takes into account innovations taking place in the job-search reflects this suite of innovations from the past 15 to 20 years of online job search. Job searching no longer involves scouring newspapers or looking for “help wanted” signs in store windows; it’s driven by push notifications on cell phones and email alerts to apply, and these technological factors affect companies’ decisions to fill open positions and on individual job seekers’ decisions to apply for them.
The model provides a theory of belief-driven fluctuations in labor supply that can permanently shift the path of the economy, and offers an explanation for persistently weak wage growth despite low unemployment during the recovery from the Great Recession.
“The high-level implication is that we don’t know which one of these outcomes we’re going to be in and we could suddenly go from one to the other,” Potter says.
He compares to it to the scenario of a bank run, as seen in the classic holiday movie “It’s a Wonderful Life” and more common in the days before federally-insured deposits: individuals worry about the security of their money being held in a bank and demand their savings be returned to them. There may not be anything wrong at the bank, but if a lot of customers think there is and show up, the bank will lose all of its money.
“All it requires is that everyone starts worrying,” Potter says, amplifying questions the paper raises about self-fulfilling prophecies: Different beliefs induce different monitoring decisions that, in equilibrium, confirm the beliefs that led to them.
In Potter’s analysis, the shock of the global financial crisis induces a change in behavior: people search much harder for jobs, keeping their cell phones with them at all times in case of alerts and making decisions about whether to apply for a position as soon as it opens or to wait. At scale, individuals making these monitoring decisions can affect the number of job openings, which in turn impacts the wages for new open positions.
“This looks like a classical labor-supply shock, one which depresses wages and reduces unemployment rate,” Potter says.
This instability could result in multiple long-run outcomes for the U.S. economy, which the paper calls “multiple equilibria”: the potential for economic recovery to lead to different levels of performance than previously seen.
In this state of indeterminacy, Potter says. “we don’t know where we’re going to go, and we could suddenly be jolted from a low-unemployment equilibrium to a high-unemployment one.”
“By 2019, unemployment had fallen below its pre-Recession level while wages seemed permanently depressed,” he adds. “This looks like a shift to a different equilibrium, rather than the world of ‘unique equilibrium,’ where things always go back to where they started.”
