Profile of Chris Pissarides and review of his work on labor economics…

IMF has a great review of an economist who is hardly known – Chris Pissarides.  And this despite getting “the prize” on the topic “which is one the most relevant” – labor markets.

The interview has this rare case of an eminent economist admitting his policy error – pushing Cyprus into adopting Euro:

The response to the 1992 launch of the euro was different on the two sides of the Atlantic Ocean. On September 21, 1992, four famous Massachusetts Institute of Technology professors—Olivier Blanchard, Rüdiger Dornbusch, Stanley Fischer, and Paul Krugman—took part in a discussion at which they agreed that “a common European currency would have unfavorable economic repercussions.” Among many Europe-based academics, in contrast, there was euphoria: “I was completely sold on the idea,” Pissarides has written. He joined the Monetary Policy Committee of the Central Bank of Cyprus “to help bring the euro to my home country.” Earlier he had worked on teams in Sweden and the United Kingdom on the implications for their labor markets of adopting the euro.

But now, he says, the adoption of the euro has “backfired: it is holding back growth and job creation; and it is dividing Europe.” The setting of macroeconomic policies may be appropriate for Germany and some northern members of the union, but it is “far too tight” in his view for the southern members of the union. Fiscal austerity in particular is “creating a lost generation of educated young people . . . The troika [European Commission, European Central Bank, and International Monetary Fund] and national governments should be softer on austerity.” Pissarides says the euro should either be dismantled or the leading members of the union should allow for looser monetary and fiscal policies to restore growth and employment creation in the south.

It is also interesting to note that he has been advising Cyprus govt for a while but has kept the hype away. In India, our eminent economists are so interested in hyping things.

A very good summary of issues in labor economics and his work follows as well:

Pissarides’s key contribution in the work that followed his dissertation was to develop the concept of the matching function. Economists use a concept known as the production function to express the relationship between inputs and outputs; technological progress can deliver more output for the same input, and sometimes adverse circumstances or bad policy choices can clog the process through which inputs are turned into outputs. Likewise, Pissarides thought of the number of unemployed people and the number of vacancies as inputs that go into the production of jobs. How well the inputs translated into jobs depended on the extent of incomplete information, on government policies, and on shocks hitting the labor market. Bean says that “although superficially a ‘black box,’ [the matching function] could be justified by a variety of microeconomic stories. It could be estimated on actual data.” Pissarides also used ideas from the field of game theory to determine how the surplus from a successful match was split between workers and employers. This, says Bean, provided “a simple but powerful theory of wage determination.”

Nice stuff..


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