Peter A. Diamond, Dale Mortensen and Christopher Pissarides shared the 2010 Nobel Prize in Economic Sciences for research into the difficulties of matching supply and demand, particularly in the labor market.
“This year’s three laureates have formulated a theoretical framework for search markets” such as ones where buyers look for sellers and applicants look for jobs, the Royal Swedish Academy of Sciences, which selects the winner, said today in Stockholm.
Diamond, 70, is a Massachusetts Institute of Technology professor and a candidate for the Federal Reserve Board whose nomination has been held up by Senate Republicans. Pissarides, 62, teaches at the London School of Economics, and Mortensen, 71, is on the faculty at Northwestern University.
“These three guys have really changed the way people think about the labor market,” said Robert Solow, winner of the Nobel Economics Prize in 1987 and professor emeritus at the Massachusetts Institute of Technology, in a telephone interview. “Their work has been the foundation, the fundamental basis for understanding flows through the labor market and the way they’re influenced by things like” unemployment insurance benefits.
All three economists suggested in separate press conferences today that unemployment is likely to be slow to decline in the wake of the worst financial crisis since the Great Depression. “I doubt unemployment will fall very much in the next two or three years,” Pissarides told reporters in London.
“The process is going to be slow,” Diamond said in a press conference in Cambridge, Massachusetts. “That’s painful for the whole economy.”
Diamond, a former teacher of Fed Chairman Ben S. Bernanke, was nominated by President Barack Obama for a Fed governor’s seat in April, subject to confirmation by the Senate. The nomination was later returned to the White House because of objections from at least one unidentified senator.
Obama, who resubmitted Diamond’s name on Sept. 13, today urged the Senate to approve the nomination in a statement congratulating Diamond and Mortensen on their award.
Richard Shelby, the senior Republican on the Banking Committee, on July 28 called Diamond a “skilled economist” while questioning whether he has sufficient expertise in monetary policy to be a Fed governor.
“This just puts an exclamation point to Senator Shelby,” said Solow, 86, and a former teacher of Diamond. “He’s not just depriving the Fed of a good nominee but of one of the world’s half dozen best economists.”
Today, Shelby said in a statement: “While the Nobel Prize for Economics is a significant recognition, the Royal Swedish Academy of Sciences does not determine who is qualified to serve on the Board of Governors of the Federal Reserve System.”
Diamond declined to comment in a telephone interview on the lawmakers who are holding up his nomination. He did urge Congress though to give more aid to state and local governments to help them keep teachers and other workers on the job.
The MIT professor’s research spans a wide range. His earliest work, published in the 1960s, focused on the long-term effects of the growing national debt on the economy.
In a paper written in 2005 with Peter Orszag, who stepped down as Obama’s budget director in July, Diamond argued that Social Security’s long-term financial health could be restored through modest cuts in benefits and tax increases.
They opposed then-President George W. Bush’s proposal to establish individual retirement accounts under Social Security, saying the system could be saved without radical reform.
Effects of Taxation
Diamond has analyzed the effects of taxation on growth and is considered a pioneer in the study of optimal taxation, which has been applied to pricing by public utilities. His work has also focused on the inter-generational impact of different policies.
Diamond studied mathematics at Yale University and received his doctorate at MIT in 1963. He joined the MIT faculty in 1966 and headed the economics department in 1985 and 1986. Diamond was named an Institute Professor, the university’s highest honor, in 1997.
Pissarides, a native of Cyprus, related job creation to the number of unemployed, the number of vacancies, and the intensity with which workers look for jobs and companies recruit applicants. The more eagerly job seekers look for work, the more jobs companies are likely to offer because it will be easier to fill them, according to Pissarides.
Influencing Policy Makers
“I started immediately after graduating from university focusing on the problems of unemployment, which was on the rise back then in Europe continuously,” Pissarides said today in an interview. “Our work can help tackle unemployment,” he said. “If it becomes further known then it could influence policy makers.”
He told reporters in a press conference that the United Kingdom is “probably going a bit too fast” in cutting government spending.
“There’s nothing seriously wrong with it provided that you also take measures to reduce the adverse effects of the labor market,” he said. “It’s not clear those measures are in place.”
Pissarides received his bachelor’s and master’s degrees in economics from the University of Essex and his doctorate from LSE in 1973. After a brief stint in the research department at the Central Bank of Cyprus in 1974, Pissarides entered academia and has been an LSE professor since 1986.
He is also a research fellow at the Center for Economic Policy Research in London and the Institute for the Study of Labor in Bonn, as well as being a member of the Monetary Policy Committee of the Central Bank of Cyprus.
Mortensen, 71, received a bachelor’s degree in economics from Willamette University in Salem, Oregon, in 1961 and a doctorate in economics from Carnegie-Mellon University in Pittsburgh in 1967.
A member of the faculty at Evanston, Illinois-based Northwestern since 1965, Mortensen has also served as visiting professor at the University of Essex in the United Kingdom, Hebrew University in Jerusalem and Cornell University in Ithaca, New York.
In his research, he found that labor-market rigidities can cause unemployment as job-seekers look for the best work at the highest pay. The intensity of that job search determines how long workers stay unemployed and in turn can be affected by changes in the level and duration of jobless benefits.
Speaking to reporters in a conference call from Aarhus, Denmark, Mortensen said that today’s high unemployment rate was not the result of rigidities in the labor market and instead stemmed from the fallout from the financial crisis.
He backed the extension of unemployment benefits. While such payments can dissuade those out of work from seeking jobs, “I don’t think now is the time to worry about that,” he said.
“It may take a while” to restore business and consumer confidence in the economy, he added.
Mortensen is a past president of the Society of Economic Dynamics and one of the founding editors of the Review of Economic Dynamics.
The work of Diamond, Mortensen and Pissarides “is fundamental to modern thinking about unemployment,” Lawrence Summers, director of President Barack Obama’s National Economic Council, said in an e-mail.
As economics evolves, “their ideas will loom larger and larger in thinking not just about labor markets, but housing markets and many others,” added Summers, who is leaving the administration to return to Harvard University as a professor at the end of the year.
Alfred Nobel, the Swede who invented dynamite, in his will in 1896 established awards for achievements in physics, chemistry, medicine, peace and literature. The economics prize was set up by Sweden’s central bank in 1968. Former winners include Milton Friedman, Amartya Sen and Friedrich August von Hayek.
The award’s official name is The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel. The money, 10 million kronor ($1.5 million), a gold medal and a diploma will be handed out at a ceremony in Stockholm on Dec. 10, the anniversary of Nobel’s death.
Indiana University professor Elinor Ostrom became the first woman to win the Nobel Economics Prize last year when she received it with Oliver Williamson of the University of California at Berkeley for their work on the limits of markets and how organizations work.
From 1969 to 2009, the Nobel Prize for economics was awarded to 44 Americans, eight economists from the United Kingdom, three Norwegians and two Swedes. Economists from Germany, France, the Netherlands, India, Israel, Canada and the former Soviet Union each won once.