Economists rewarded for exploring search frictions

Two Americans and a Briton earned the 2010 Nobel Prize in Economics Oct. 11, for their research on why markets – especially the job market – don't always work as expected.

The Nobel Foundation recognized economists Peter A. Diamond, Dale T. Mortensen and Christopher A. Pissarides "for their analysis of markets with search frictions," according to the Nobel Prize official Web site. Search frictions are theobstacles that prevent buyers and sellers from automatically finding each other.

This portion of economic analysis, otherwise known as "search theory," relates particularly to the current job market. Taking the market into account, search theory seeks to find the reasonsfor why job searches among the unemployed remain protracted, especially in labor markets where jobs are available.

According to the Nobel Prize Web site, Diamond, Mortensen and Pissarides found that people are not interchangeable entities—they have different skills and weaknesses—and that jobs are also not identical. Therefore, it takes time for the right person to be matched to the right job.

A key part of the economists' research is that government policies sometimes have unintended consequences. For example, if people are paid not to work, then they have less incentive to find a job.

University economics professors agree that the findings of Diamond, Mortensen and Pissarides have allowed for more understanding of current economic issues.

"[Their research has] already had a huge influence on the field," said economics professor Melissa Kearney. "It has spurred a lot of theoretical and empirical literature and response."

Economics professor Mark Duggan said that the prizewinners' work is valuable because it addresses unemployment insurance programs, a key part of the U.S. economic landscape.

"With the unemployment rate so high, unemployment insurance programs are a big issue right now, and [economists] are thinking a lot about their design and how people are searching for jobs," Duggan said. "The economy is kind of in unchartered territory right now with respect to many factors, but their research is really useful for thinking about how to move ahead in tweaking these programs in response to economic conditions." 

Kearney and Duggan are not very familiar with Mortensen, of Northwestern University, and Pissarides, of the London School of Economics and Political Science, but both have had the opportunity to work personally with Diamond, who is a professor of economics at the Massachusetts Institute of Technology. As a graduate student at MIT, Kearney studied public economics with him, and Duggan taught a course with him at the same college in 2002. Both said they think Diamond's work is brilliant.

"Many economists are geniuses; he's kind of on another level," said Duggan, who teaches public finance. "And his research is really good. I'm thrilled for him."

"My response to [Diamond's] winning: it's about time," said Kearney, who teaches in the area of public economics. "There were a number of things he could have won a Nobel Prize for.  I thought he would have won for the overlapping generations model or for his work on optimal taxation; so it was a delight to hear him finally be announced the winner."

While Diamond was nominated to serve on the Federal Reserve Board of Governors in April, Senators balked at approving him for the post because they thought he was too inexperienced. But President Barack Obama re-nominated Diamond in September.

"This time will be different," Duggan said. "Many expect that the Nobel Prize will push him over the top for the nomination."