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This article is from the In-Depth Report The 2010 Nobel Prizes

Economics Nobel Awarded for Efforts to Understand and Fight Unemployment [Updated]

Diamond, Mortensen and Pissarides honored for model to help economists study "search frictions"
unemployment, Nobel, labor



© AGNIESZKA GAUL, VIA ISTOCKPHOTO

Massachusetts Institute of Technology (M.I.T.) associate professor Peter A. Diamond, Northwestern University professor Dale T. Mortensen and Longer School of Economics and Political Science professor Christopher A. Pissarides won the Sveriges Riksbank Prize in Economic Sciences on Monday. Their work in the 1970s and 1980s sought to explain "search friction," in particular in the employment market, where unemployed workers and employers expend time, effort and money to find and fill job openings.

Diamond, Mortensen and Pissarides's research improved economists' understanding of markets with search friction, in particular the time and effort that buyers and sellers expend to locate each other in the marketplace, according to the Royal Swedish Academy of Sciences. The economists' approach can be applied to a number of markets that deal in "nonstandardized" goods, including employment and housing. The laureates questioned how prices and quantities work in such markets, how government can assist, what determines the level of unemployment and whether there are labor-market policies that can help.

The "DMP model" has helped create a better understanding of how the labor market works and has provided an important policy tool over the years, according to the academy, which added that this theoretical framework for search markets can be used to answer the questions: 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?

The laureates' research helps explain the ways unemployment, job vacancies and wages are affected by regulation and economic policy. One conclusion to be drawn from the laureates' work is that more generous unemployment benefits give rise to higher unemployment and longer search times.

When reached by phone by the Nobel committee on Monday, Pissarides, 62, said he started studying the problem in the 1970s when unemployment was rising rapidly in Europe. At the time, no coherent, complete theory had yet been posed to understand whether the job market worked well.

"The models for studying unemployment were not well suited to the problem we were studying," Pissarides said. "Think of unemployment as the unemployed person having lost his or her job as a result of changes in the economic environment." Pissarides wanted to look at the factors that help a person to go from being unemployed to finding a job. For example, could the individual person looking for a job somehow speed the process? He and his fellow laureates discovered that the most important factor in fighting unemployment getting the unemployed back to work as quickly as possible and that this does not necessarily require expensive job training.

Diamond, 70, specialized in studying efficiency, finding that even very small search costs can have a large impact on whether supply and demand are met. The M.I.T. economist made news in August when the Senate rejected his nomination by the Obama administration to join the Federal Reserve Board. Senators argued that Diamond does not have the macroeconomic policy background necessary to sit on the Fed, the Wall Street Journal reported. President Obama was expected to re-nominate Diamond even before he won the Nobel.

Mortensen (pdf), 71, is known for focusing on labor economics, macroeconomics and economic theory. In the labor market, he has focused on turnover and reallocation, research and development and personal relationships.

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