Supply and demand is a fundamental economic concept, and unemployment is a totemic economic problem. But apply the concept to the problem, and you will not get very far. The logic of supply and demand says that if wages are high, lots of people will want to work, but few people will want to employ them; if wages are low, employers will be hungry to go hiring, but few people will want to work. At equilibrium, the number of hours available equals the number of hours people are willing to work. Unemployment is impossible, unless there is a minimum wage - this suggests, for instance, that unemployment was unknown in the UK before April 1 1999, which is not my recollection. The supply-and-demand approach offers little insight into job-market recessions, or why different countries have such different experiences of employment.
In this year's Royal Economic Society public lecture, Christopher Pissarides, winner of the Nobel memorial prize in economics in 2010, set out to resolve the mystery. Pissarides, along with Peter Diamond and Dale Mortensen, has developed a model of job-matching that has become the standard way macroeconomists think about labour markets.
The basic insight is nothing staggering. There are job-seekers in the world, and there are job vacancies in the world, and the aim is to match seekers to vacancies to create actual “jobs”, which are matched pairs of former vacancies and former job-seekers. Searching for suitable vacancies, or suitable employees, is costly, and neither job-seeker nor employer knows whether any match will work out.