Damien Grant: Laureates explain why we settle for easiest option

Offering or accepting a job is a major economic decision. Photo / Dean Purcell

Opinion

How craggy country and western singer Lyle Lovett managed to snare movie star Julia Roberts - albeit briefly - may be explained in the work of the three economists awarded the Nobel Prize in Economics last week.

The trio investigated search costs, principally search costs in the labour market.

Search costs are the time taken to investigate a purchase before a buying decision is made. Because it costs time, and sometimes money, to investigate all possible suppliers we tend to sample a small section of the market before making a decision.

As a result, businesses do not need to be the cheapest or the best to win customers. Even if the cost of searching is small, only a few customers will seek out the cheapest supplier.

Search costs explain why we see inefficient businesses with poor customer service continue to survive, even in a competitive market. It simply takes more time than it is worth for most of us to find the best deal - see Julia and Lyle.

The three laureates extended the idea of search costs into the labour market. Why do we see unemployment on one hand and job vacancies on the other?

Offering or accepting a job is a major economic decision and employers and employees invest considerable resources into the process. Decisions take time, resulting in unemployment. The laureates then developed models of the labour market that allowed economists to determine the effects of policy changes in areas such as minimum wage laws and welfare benefits.

Increasing the unemployment benefit reduces the incentive for workers to accept job offers, forcing employers to increase wages and reducing the total number of jobs in the economy. At the same time, unemployment benefits allow workers more time to search and result in better employment outcomes when job matches are found.

However, because of the high costs involved, most people take the first good job offer they get, while employers often pick the best of a bad crop of applicants. The models show that increased investment in searching for employment can have significant pay-offs, because even a marginally better job or employee has great long-term effects. The prospect of high search costs can therefore favour inefficient firms. Customers continue to buy from them and they retain quality workers, despite better opportunities that exist elsewhere.

High search costs also favour the aesthetically impaired. Not all pretty women are runaway brides who head to Bali in search of fulfilment. Some remain by the side of the first chump to pony up with an offer. Give those men a Nobel prize.