3 Share Nobel Economics Prize for Labor Analysis
A screen shot from the announcement in Stockholm on Monday shows the recipients of the Nobel in economic science: Peter A. Diamond, Dale T. Mortensen and Christopher A. Pissarides.
By CATHERINE RAMPELL
Published: October 11, 2010
The 2010 Nobel Memorial Prize in Economic Science was awarded on Monday to Peter A. Diamond, Dale T. Mortensen and Christopher A. Pissarides for their work on markets where buyers and sellers have difficulty finding each other, and in particular on the difficulties of fitting people to the right jobs.
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For decades, the researchers have studied what happens when a market is not made up of identical, cookie-cutter units — as is the case with the job market, where workers have different skills and weaknesses, and where all companies have different types of jobs they need to fill. In many cases, there are significant obstacles to finding the ideal match between a buyer and a seller, like matching a job-provider to a job-seeker.
Professor Diamond, 70, an M.I.T. professor and a nominee to the Federal Reserve Board who was effectively blocked by the Senate in August, first developed a broad theoretical framework for studying markets with so-called “search costs” in 1971. Professors Mortensen, 71, of Northwestern University, and Pissarides, 62, of the London School of Economics, later worked with Professor Diamond to apply the framework to the job market in particular, and how government policy could improve and speed up the matching of workers to jobs.
“The Laureates’ models help us understand the ways in which unemployment, job vacancies, and wages are affected by regulation and economic policy,” according to the citation from the prize committee.
Some of the applications of the research include understanding why unemployment rises during recessions, why different people get different wages, and how so many people can be unemployed at the same time there are a large number of job openings available.
Their work has suggested, for example, that unemployment benefits can have the unintended consequence of prolonging joblessness by making it less costly to stay unemployed.
“That’s a big controversy in the U.S. recently,” said Robert Shimer, an economics professor at the University of Chicago whose work has built upon the research honored by the Nobel memorial prize committee. “Most of these models suggest that even in a depressed economy, more generous unemployment benefits tend to raise the unemployment rate. Benefits are obviously good for the unemployed, but there are some clear tradeoffs.”
The research also helps explain why in the last few decades European labor markets have been much more rigid than American ones, a frustrating problem that Professor Pissarides, a native of Cyprus, said helped inspire him to study the search costs of labor markets in the first place.
“Many European countries put restrictions on the ability of firms to hire and fire,” said Lawrence F. Katz, a professor of labor economics at Harvard. “If you make it harder to hire and fire, then you end up with what’s called a sclerotic labor market, with less movement between jobs and more long-term unemployment.”
This year’s choice of economics prize winners is considered by many researchers to be particularly timely given today’s economic climate, in which many developed countries like the United States are facing stubbornly high levels of unemployment.
In a telephone interview with reporters at the Nobel news conference in Sweden, Professor Pissarides said that he thought the work being honored had one lesson in particular for today’s policy makers: “What we should really be doing is make sure the unemployed do not stay unemployed for too long, to try to give them direct work experience,” so that they “don’t lose their attachment to the labor force.”
So-called “search theory” has also been applied to many other areas, like housing, public economics, family economics, finance and monetary economics.
Justin Wolfers, an economics professor at the University of Pennsylvania, has applied the framework in his own work on marriage markets, for example.
“Labor economists think about firing costs, and family economists think about divorce costs,” Professor Wolfers said. Just as restrictions on firing an employee make fewer workers available for new positions — and therefore make companies more skittish about replacing their current workers — low divorce rates can be self-perpetuating by restricting the number of eligible mates who are available to unhappy spouses contemplating a divorce.
While the applications of Professor Diamond’s Nobel-winning work are broad, his practical experience was questioned earlier this year when he was nominated for a Fed governor position.
In August, Senator Richard C. Shelby, Republican of Alabama, asserted that Professor Diamond did not have enough experience for the position, saying, “I do not believe that the current environment of uncertainty would benefit from policy decisions made by board members who are learning on the job.”
President Obama had nominated Professor Diamond in April for a position on the Fed board, where he would serve under the economist’s former student and now chairman Ben S. Bernanke. But in August, under an obscure procedural rule, the Senate sent Mr. Diamond’s nomination back to the White House before starting its summer recess.
President Obama renominated Professor Diamond for the open Fed position on Sept. 13. Although an additional hearing still has to be held, it is believed that Senate Republicans will ultimately not try to use a filibuster to block his nomination. (His nomination was said to have been initially blocked in retaliation for a refusal by Democrats to give a full, 14-year term to Randall S. Kroszner, a former Fed governor who served on the board from 2006 to 2009.)
If confirmed, Professor Diamond would fill a 14-year term that expires on Feb. 1, 2014.
Two other officials — Janet L. Yellen and Sarah Bloom Raskin — who were nominated in April along with Mr. Diamond were confirmed in late September.
The Nobel in economic science is awarded by the Royal Swedish Academy of Sciences, and is not one of the original prizes created by Alfred Nobel. Rather, it is formally known as the Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel. In addition to a medal and a diploma, the laureates receive 10 million Swedish kronor, or about $1.5 million.
Last year, the prize was awarded to social scientists, Elinor Ostrom at Indiana University, and Oliver E. Williamson of the University of California, Berkeley, for their work in describing the numerous relationships within a company or among companies and individuals that shape market behavior.