Stiglerian Growth.

• Author: Menzio, Guido

Search frictions in the labor market make it difficult for workers to locate the jobs that best suit their abilities. Search frictions in the product market make it difficult for buyers to find the products that best suit their preferences. Improvements in information and communications technology (ICT) that have ostensibly reduced search frictions--telephones, fax machines, the internet, smartphones--should have made it easier for workers to find better jobs and, in turn, led to labor productivity growth. The same technological improvements should have made it easier for buyers to locate sellers and, in turn, led to welfare gains.

I refer to the economic growth generated by declining search frictions as "Stiglerian growth" because George Stigler was the first to recognize the importance of information frictions in product and labor markets, and to understand that they can cause misallocation. In Stigler's words, "The better informed the labor market, the closer each worker's product to its maximum at any given time," and conversely, "In a regime of ignorance, Enrico Fermi would have been a gardener, Von Neumann a checkout clerk at a drugstore." (1)

Stiglerian Growth in the Labor Market

Paolo Martellini and I try to measure the effect of declining search frictions on productivity growth in the labor market. (2) Measuring this effect requires identifying the structure of the search problem facing workers and firms, assessing the effect of technological improvements on the rate at which workers and firms come into contact, and assessing the addition to productivity induced by an increase in the contact rate between workers and firms.

Search frictions in the labor market cause unemployment and vacancies to coexist. In fact, search frictions make it time-consuming for workers to locate job openings and for firms to locate workers to fill vacant jobs, and in aggregate they lead to the coexistence of unemployment and vacancies. As search frictions decline due to improvements in ICT, one would expect the labor market to converge towards an equilibrium in which the unemployment and vacancy rates are both zero. Indeed, this is the prediction of the canonical Diamond-Mortensen-Pissarides search-theoretic model of the labor market.

This prediction is not borne out in the data, calling this model into question. Figure 1 is the scatterplot of the unemployment rate and the vacancy rate--the Beveridge curve--in the United States from 1927 to 2019. There is no evidence that the curve has shifted inward--to the left--over time. Figure 2 plots the time series of the unemployment rate and the vacancy rate, and Figure 3 plots the time series of the rate at which unemployed workers become employed (UE rate) and the rate at which employed workers become unemployed (EU rate). There are no clear secular trends in any of these series.

A credible search model must rationalize the stability of the Beveridge curve and the stationarity of unemployment, vacancy, UE, and EU rates in the face of the massive improvements in ICT that took place between 1927 and 2018. How can it do that? Suppose that firms and workers searching the labor market meet according to some matching function with an efficiency parameter that grows over time at the rate of [g.sub.A]. Suppose that upon meeting, a firm and a worker observe how productive their match will be, and based on that, they decide whether to enter an employment relationship. In such a model, declining search frictions have two countervailing effects on the unemployment rate. On the one hand, declining search frictions increase the rate at...