Trio analyzed hurdles to market efficiencies
STOCKHOLM, Sweden – Two Americans and a British-Cypriot economist won the 2010 Nobel economics prize 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 honored along with Dale Mortensen and Christopher Pissarides with the $1.5 million prize for their analysis of the obstacles that prevent buyers and sellers from efficiently pairing up in markets.
Diamond – a former mentor to current Federal Reserve Chairman Ben Bernanke – analyzed the foundations of so-called search markets, while Mortensen and Pissarides expanded the theory and applied it to the labor market.
Their work, dating back to the 1970s and ’80s, sheds light on why the classical view of markets, in which prices are set so that buyers and sellers always find each other and all resources are fully utilized, doesn’t always apply to the real world.
One example is the housing market, where buyers can struggle to find new homes even though there are a number of unsold properties available.
Another is the labor market. Because searching for jobs takes time and resources, it creates friction in the job market, helping explain why there are both job vacancies and unemployment simultaneously, the Royal Swedish Academy of Sciences 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.
Bernanke was one of Diamond’s students at MIT. When Bernanke turned in his doctoral dissertation in 1979, he thanked Diamond for being generous with his time and reading and discussing Bernanke’s work.
Diamond said he was returning to his suburban Boston home from New Zealand when he found out about the prize. His wife and son picked him up from Logan Airport and he got a phone call from a friend.
“Fortunately I was sitting down and wasn’t behind the steering wheel,” Diamond said.
Diamond wrote a paper in the early 1980s that found that unemployment compensation can lead to better job matches. Workers “become more selective in the jobs they accept” because of the employment aid. That makes for better matches and increases efficiency, he found.
He told a Senate committee during his nomination hearing in July that a central theme of his research has been how the economy deals with risks that affect both individuals and the entire economy.
“In all my central research areas, I have thought about and written about the risks in the economy and how markets and government can combine to make the economy function better for individuals,” he told the panel.