A Nobel Prize That's All About Jobless Debate

(Oct. 11) -- At a time when the human toll of global financial turmoil remains one of the biggest public challenges, this year's Nobel Prize in economics directly addresses the job-market disruption at the heart of national and international debates.

The Royal Swedish Academy of Sciences today awarded the prize to two American economists, Peter Diamond and Dale Mortensen, and British-Cypriot economist Christopher Pissarides, "for their analysis of markets with search frictions" -- and specifically the problems that impede employers and workers from finding each other.
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"The Laureates' models help us understand the ways in which unemployment, job vacancies and wages are affected by regulation and economic policy," the prize committee said.

Their use of search theory has also been applied in other areas, the committee noted, including the housing market, where they have helped make sense of how "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."

The particular choice of Diamond, whose seminal research nearly 40 years ago opened up this line of study, immediately made waves in Washington, where President Barack Obama's appointment of Diamond to serve on the board of the Federal Reserve has been stalled by Republicans.

Obama issued a statement congratulating Diamond and Mortensen on the prize and noted that he nominated Diamond to the Fed "to help bring his extraordinary expertise to our economic recovery. I hope he will be confirmed by the Senate as quickly as possible."

Senate Banking Committee Chairman Christopher Dodd has said he will hold a hearing on Diamond's nomination after the midterm elections.

But Sen. Richard Shelby, a top Republican on the Banking Committee, issued a statement saying that "the Royal Swedish Academy of Sciences does not determine who is qualified to serve on the Board of Governors." Republicans who have blocked a vote on Diamond's nomination say he doesn't have the hands-on macroeconomic experience needed for the Fed.

Still, Nobel Prizes aren't awarded in a political vacuum. And with the ailing jobs market now viewed by the Fed as the No. 1 economic problem facing the U.S. -- and one likely to elicit new Fed actions when the central bank meets next month -- the prize committee may have had the current debate in mind.

The prize citation noted that the trio's theories 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?" and "How can economic policy affect unemployment?"

Economists had already begun to use mathematical models to study how buyers and sellers try to find acceptable prices in the marketplace when Diamond wrote a 1971 article examining how buyers' search behavior -- like employers' search for new workers -- affects the process.

Diamond, Mortensen and Pissarides went on to further work that provided two key insights, the prize committee said, about how factors outside the activities of the employers and workers affects job searches and hiring, and how unregulated markets might not make for the most efficient hiring environment.

"This, in turn, implies that there is reason for governments to try and find ways of inducing the economy to move towards the best outcome," the prize committee said.

The so-called Diamond-Mortensen-Pissarides model specifically describes the job-search activity of the unemployed and the recruiting behavior of companies, and how this translates into wage setting.

"When a job seeker and an employer find one another, the wage is determined on the basis of the situation on the labor market (the number of unemployed workers and the number of vacancies)," the committee said. "The model can thus be used to estimate the effects of different labor-market factors on unemployment, the average duration of spells of unemployment, the number of vacancies and the real wage. Such factors may include the benefit level in unemployment insurance, the real interest rate, the efficiency of employment agencies, hiring and firing costs, etc."

The three economists also looked into longer-term unemployment and found that "rapid structural changes that increase" companies' layoff rates -- like the recent financial crisis and recession -- "could be a sign that long-term unemployment will increase."

On Friday, the Labor Department, in announcing the latest dismal month of job creation and a still painfully high unemployment rate of 9.6 percent, said the number of Americans officially without work for 27 weeks or more was at 6.1 million in September.