Opinion The Nobel and naukri.com

A fundamental premise in economics is that,in any market for a good or service,the price paid or received and the quantity demanded or supplied get determined by the supply and demand for that good or service. For example,as the demand for potatoes increases,so does the price that people are willing to pay for a kilogramme of potatoes; potato suppliers thereby supply a greater amount. If the supply of rice increases because of a bumper kharif crop,then producers are willing to supply the same one kilogramme of rice at a lower price; thus,more rice is supplied at a lower price per kilogramme.

However,this simple framework leaves unanswered some important questions relating to employees and their employers. Why do unemployed workers sometimes choose to remain unemployed,say by turning down job offers? What determines the lengths of employment and unemployment spells? Why do we have unemployed workers and unfilled vacancies at the same time? What macroeconomic factors determine the aggregate level of unemployment and the number of vacant jobs in an economy? How is it possible that two workers who possess identical skills and perform similar jobs earn different wages? What are the costs and benefits to a company in paying higher wages to its workers? How does the wage paid affect the likelihood of retaining employees? Can employee turnover be good for a firm? If yes,how much turnover is optimal? The theory developed by these three Nobel laureates helps to answer these fundamental questions.

Their theory starts from recognising a practical limitation to the supply-demand framework,which predicts that if the supply of rice increases,more kilogrammes of rice would get supplied at a lower price the very next moment. In practice,the rice farmer searches for the mandi that would give him the best price. Furthermore,the closest mandi may buy only Basmati. He has to then search for the mandi that will buy the Dubraj crop that he has to sell. The wholesale buyer undertakes similar searches for the most suitable seller as well. Economists refer to the costs incurred in the search process in the form of time and money spent and any opportunity lost as “search costs.” These search costs introduce frictions in the market place; due to these frictions,more rice may not be supplied at a lower price the very next moment after an increase in supply.

These economists were the first to incorporate the effect of search costs into the canonical supply-demand framework. As any employed youth can confirm,searching for a good job takes time,costs money and can mean lost opportunities. Similarly,a firm looking to fill a vacancy also incurs search costs. Since it takes time for workers to find jobs and for firms to fill vacancies,unemployed workers and unfilled vacancies can indeed coexist. While one does not need a full-blown theory to understand this fact,being able to explain simple facets of the real world provides an important sanity check for any ntheory. More importantly,incorporating these search costs enables economists to answer each of the important questions described before.

Websites such as naukri.com help to reduce these search costs by bringing potential employees and employers together. In addition to the market for labour,the theory developed by these economists has been used in monetary theory,industrial organisation,finance,and the marriage market. Thus,apart from naukri.com,websites such as bharatmatrimony.com,shaadi.com,and so on also owe their rationale to the theory developed by these economists. In fact,the success of such websites that reduce search costs is in itself an empirical validation of their theory.

The writer teaches at the Indian School of Business,Hyderabad