Two Americans and a British-Cypriot economist won the 2010 Nobel economics prize on Monday for developing a theory that helps explain why many people can remain unemployed despite a large number of job vacancies.
Federal Reserve board nominee Peter Diamond was honoured along with Dale Mortensen and Christopher Pissarides with the 10 million Swedish kronor ($1.5 million) prize for their analysis of the obstacles that prevent buyers and sellers from efficiently pairing up in markets.
Mr. Diamond — a former mentor to current Federal Reserve chairman Ben Bernanke — analysed the foundations of so-called search markets, while Mr. Mortensen and Mr. Pissarides expanded the theory and applied it to the labour market.
Since searching for jobs takes time and resources, it creates frictions in the job market, helping explain why there are both job vacancies and unemployment simultaneously, the academy said.
“The laureates’ models help us understand the ways in which unemployment, job vacancies and wages are affected by regulation and economic policy,” the citation said.
Mr. Diamond, 70, is an economist at the Massachusetts Institute of Technology, and an authority on Social Security, pensions and taxation.
President Barack Obama has nominated Mr. Diamond to become a member of the Federal Reserve. However, the Senate failed to approve his nomination before lawmakers left to campaign for the midterm congressional elections.
Senate Republicans have objected to what they see as Mr. Diamond’s limited experience in dissecting the inner workings of the national economy.
Mr. Bernanke was one of Mr. Diamond’s students at MIT. When Mr. Bernanke turned in his doctoral dissertation back in 1979, one of the people he thanked was Mr. Diamond for being generous with his time and reading and discussing Mr. Bernanke’s work.
Mr. Pissarides, a 62-year-old professor at the London School of Economics, told The Associated Press that the win was “a complete surprise“.
“The happiness is even more when it comes as a surprise,” he said, speaking from his north London home.
Mr. Pissarides said that his work had already helped shape official thinking on both sides of the Atlantic.
For example, he said that the New Deal for Young People, a British government initiative aimed at getting 18-24-year-olds back on the job market after long spells of unemployment, “is very much based on our work.”
Excerpts from 2009 Nobel Prize economic citation:
Excerpts from the citation awarding the 2010 Nobel Memorial Prize in Economic Sciences to Americans Peter Diamond and Dale Mortensen and Christopher Pissarides, a British and Cypriot citizen.
“Why are so many people unemployed at the same time that there are a large number of job openings? How can economic policy affect unemployment? This year’s Laureates have developed a theory which can be used to answer these questions. This theory is also applicable to markets other than the labor market.”
“On many markets, buyers and sellers do not always make contact with one another immediately. This concerns, for example, employers who are looking for employees and workers who are trying to find jobs. Since the search process requires time and resources, it creates frictions in the market. On such search markets, the demands of some buyers will not be met, while some sellers cannot sell as much as they would wish. Simultaneously, there are both job vacancies and unemployment on the labor market.”
“This year’s three Laureates have formulated a theoretical framework for search markets. Peter Diamond has analyzed the foundations of search markets. Dale Mortensen and Christopher Pissarides have expanded the theory and have applied it to the labor market. The Laureates’ models help us understand the ways in which unemployment, job vacancies, and wages are affected by regulation and economic policy. This may refer to benefit levels in unemployment insurance or rules in regard to hiring and firing. One conclusion is that more generous unemployment benefits give rise to higher unemployment and longer search times.”
“Search theory has been applied to many other areas in addition to the labor market. This includes, in particular, the housing market. The number of homes for sale varies over time, as does the time it takes for a house to find a buyer and the parties to agree on the price. Search theory has also been used to study questions related to monetary theory, public economics, financial economics, regional economics, and family economics.”