Dale T. Mortensen-You Gotta Work Before You Work

Lately I’ve been knee deep in the process of job searching. Let me tell you guys, this is an ordeal. Although most people don’t think about it this way, finding a job is very costly! It’s a difficult process with a lot of what economists would call unseen costs. There are the costs of finding jobs that match my interests and skills. Then the cost of sending out my resume and applications to as many job opportunities I can get my hands on. Next, there are the costs of interviews to see if I’m a good match for the position. This takes a lot of time and sometimes I’m just not motivated to overcome all these costs.

I’m not the only one facing a lot of costs in the job market; the employers are also taking on a lot of the same costs. They have to take costs of sifting through resumes, performing interviews, and dedicating time to finding a good match.

Dale T. Mortensen wrote on the costs of the job market. He won the 2010 Nobel prize along with Peter A. Diamond and Christopher A Pissarides “for their analysis of market frictions”. For Mortensen, market frictions meant those that occurred in the job market.

In order for me to explain what he contributed to the economics field, I’m going to take a step back and talk about the classical model of pure competition in general. In a nutshell, pure competition starts with the idea that everything will be perfectly allocated so that every buyer and seller who are willing to trade actually do trade. Pure competition is frequently criticized, as people point out different markets where allocation doesn’t actually occur. The job market is one of these areas of criticism.

Mortensen explains why every employee does not find their matching employer. When you look for a job you have in your mind a set of future payouts. Something along the lines of “If I get this job as a Wendy’s cashier now, I’ll earn 7.25 for the first year or so, but in 3 years, I can become manager.” With all of these benefits in mind, you start thinking if the time is worth the cost. This naturally brings up the costs of other potential jobs you could have. “I mean Chick-Fil-A gives me Sundays off and slightly better pay, maybe I should apply for that job instead.” If you’re like me, I start considering the odds of getting that job with all the costs. It’s all a huge complicated mathematical process, but we process it all in our heads without even thinking about it!

Okay this is getting complicated, but it goes a step further because the employers are also going through a similar process. They have to consider what  benefits you’ll bring the company and for how long. Is the applicant going to create enough value to be worth the salary? There could be an applicant coming in later on that’s a better match for the company. This all leads to a process that doesn’t always come out neatly. Sometimes there are poor employee matches.  Most of the time, the ideal employee-employer match just never happens.

Mortensen contributed to these dilemmas by noticing and looking into the messiness of the job market. He created both linear and quadratic matching functions that better fit the job market in reality. He found game theory solutions for how to best behave when searching in the job market. The best strategy is one “that maximizes the agent’s expected future income given the strategies of all the other participants”.

Okay, so what does this mean in the actual job market? It means I’m going to be putting a lot more effort into applying for a highly competitive research assistant job than I would for a job at a McDonalds that always has the “Now Hiring” sign in the window. It also shows why employers are always asking if you’re applying anywhere else during an interview. You’re both judging the value and the competition of who you’re matching with to see how much effort you need to put into it.

This is basically the same as what another Nobel winning economist, John Nash said for game theory, and may come across as common sense. However, this was the first time it was actually applied to the job market and was innovative with the addition of search costs.

If you think this is depressing, just wait until you see this applied to relationship matching or finding the perfect home. I’ve crushed enough dreams for the day, so I’ll leave that rainy day for Kenzi or Kevin. The fact of the matter is, economics is everywhere. When you start to apply these frameworks to your own life, you begin to see it everywhere too. It’s an amazing lens to view the world with, and it might even help you land a job someday.

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