The Unassuming Economist

Try this at home. The chart below shows you the relationship between unemployment and output (to be precise, it is the relationship between the change in unemployment and output growth). The chart is automatically updated, starting with the relationship as it appeared in 1948 to 1963, and then adding 10 additional years at a time to bring it all the way to the present. (You can also click on this link to see these charts: Okun’s Law Over Time.) Now here’s the first question on the test: Do you think the relationship shown in these charts has remained strong and stable over time?

Here’s the link to another macroeconomic relationship, this one between unemployment and inflation. Same deal: first you see the relationship over the 1948 to 1963 period and the charts that follow add 10 years at a time. (You can also click on this link to see these charts: Phillips Curve Over Time.) Second question on the test: Do you think the relationship shown in these charts has remained strong and stable over time?


If you are suspecting a trick you are right. To the lay person, it probably seems that the first relationship, known as Okun’s Law, is strong and stable and the second relationship, known as the Phillips Curve, is weak and unstable. But macroeconomists actually worry a lot that Okun’s Law is dead. And—using special goggles known as ‘econometrics’—they are able to see the Phillips Curve where the lay person may just see a cloud.

Robert Gordon, a renowned macroeconomist, for example has proclaimed the demise of Okun’s Law and noted that, in contrast, the Phillips Curve is ‘alive and well’. This is what keeps macroeconomics interesting: things may not be what they seem. (For what it’s worth, I think that Okun’s Law is alive and well and that the Phillips Curve is being kept alive with artificial resuscitation—but then I’m closer to a lay person than to a renowned macroeconomist.)

Prakash Loungani profiles Christopher Pissarides, winner of the 2010 Nobel Prize for work on unemployment and labor markets

NOBEL Prize awards for economics sometimes contain a touch of whimsy: they honor people with opposing views—such as the 1974 award to the left-leaning Karl Gunnar Myrdal and the libertarian Friedrich August von Hayek—or reach back to recognize academic achievements long forgotten. The 2010 award was given to a like-minded group: it recognized Peter Diamond, Dale Mortensen, and Christopher Pissarides, whose research coalesced in the 1990s into a workhorse model of unemployment and the labor market. And the time was right. In the aftermath of the Great Recession, 200 million people across the globe were unemployed, and getting them back to work was the most urgent economic policy task.

For Pissarides, a Cypriot of Greek descent, understanding unemployment has been his life’s work since the 1970s. It took 20 years of academic toil before the impact of his research started to transform the way economists think about unemployment—and then for its influence to seep through to policy. IMF chief economist Olivier Blanchard, a noted scholar of unemployment himself, says: “Chris persevered. And history has proven him right. There is an important lesson to researchers here. When you think you are right, don’t listen too much to others.”

Today, with everyone listening to him, Pissarides can use the bully pulpit afforded by the Nobel Prize to help address the unemployment crisis in Europe. He has supported some policies of the so-called troika of lenders—the European Commission, European Central Bank, and International Monetary Fund—but has been an outspoken critic of others (see box). He has been particularly active in his home country of Cyprus, where as head of the national economic council—akin to the Council of Economic Advisers in the United States—he advises the president on issues ranging from bank restructuring to the business model for Cyprus in the future. “Cyprus has some 10 TV channels,” says Pissarides, “and they are all chasing me for my views. Sometimes I want to retreat to my university office and lock the door. But I know if I do that, I will regret it. This is the time to help.”

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Services are gaining newfound respect as the basis of modern global trade

In 1988, General Motors launched an ad campaign with a memorable jingle: “This is not your father’s Oldsmobile. This is the new generation of Olds.” The car’s image had not kept up with its transformation from a staid cruiser to something far more high-tech and stylish. The service sector could use such an ad campaign: it too needs an image makeover to match its transformation over the past decade. The Oldsmobile didn’t make it, but the service sector is here to stay—it already accounts for 60 percent of global employment.

Prejudice against the service sector runs deep. Some regard it as the useless sibling of other sectors of the economy such as agriculture and manufacturing. In The Wealth of Nations, Adam Smith questioned the social value provided by “churchmen, lawyers, physicians, men of letters of all kinds, players, buffoons, musicians, opera-singers, opera-dancers, etc.” To this day, as economist Christina Romer lamented in a New York Times op-ed, there is a “feeling that it is better to produce ‘real things’ than services” (Romer, 2012).

Others have treated services not as socially useless but as somewhat challenged. A famous 1967 paper by U.S. economist William Baumol fostered the view that services is a sector resistant to improvements in productivity. He noted that the provision of services—such as restaurant meals, haircuts, and medical checkups—required face-to-face transactions. These did not lend themselves easily to standardization and trade, the source of growth in productivity and hence income.

This image is no longer a fair representation of the service sector. Service occupations today include a few that even Smith might have considered useful. Trade in services has increased within and across national borders. Many services are now high tech and pay high wages. And increasingly, manufacturing and services, far from being competing siblings, are part of a joint family of value creation. Services are ever more critical to the successful operation of manufacturing, debunking debate over countries’ need to choose between the two sectors.

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The Science Magazine has dedicated a special issue on the science of inequality, which features articles from the following authors: H. Pringle, A. Deaton, E. Pennisi, M. Ravallion, E. Marshall, T. Piketty and E. Saez, and others. 

“This important and fascinating book surely ranks among the most influential economic analysis of recent decades. Much of the debate over inequality in recent years is the result of the work of Thomas Piketty and his fellow researchers.­