Three academics, including Fed nominee, awarded Nobel for employment theories
By Neil Irwin
The Nobel prize in economics was awarded Monday to three economists who did pioneering research on unemployment that led to better understanding of the factors that can keep people out of work.
Peter Diamond, one of the recipients of the prize, was nominated by President Obama earlier this year to serve on the Federal Reserve Board of Governors. Diamond, 70, is a professor at the Massachusetts Institute of Technology. The other American recipient is Dale Mortensen of Northwestern University. Christopher Pissarides of the London School of Economics also received the prize.
Obama praised the Americans on Monday and referred to Diamond's nomination: "I congratulate Peter Diamond and Dale Mortensen on winning the Nobel Prize in Economics for their groundbreaking economic research that has applications in a wide range of areas, like unemployment and housing, where we need our best and brightest minds.
"I have nominated Peter to the Board of Governors of the Federal Reserve to help bring his extraordinary expertise to our economic recovery. I hope he will be confirmed by the Senate as quickly as possible."
The Senate has not held a vote to confirm Diamond. Sen. Richard Shelby (R-Ala.), is holding up the nomination, arguing that Diamond may be unqualified to serve at the Fed given that his background is not in monetary policy.
The economists' work has particular relevance in the current economic moment, with sky-high joblessness in the United States and many countries around the world. The scholars' research has helped explain the inner workings of the labor market, including why, in a deep economic downturn, unemployment can become entrenched for many years
"The laureates' models help us understand the ways in which unemployment, job vacancies and wages are affected by regulation and economic policy," said the Royal Swedish Academy of Sciences, in announcing the prize, which is known formally as the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel.
A 1994 paper by Mortensen and Pissarides, which builds on work by Diamond, showed how shocks that spark sharp rises in unemployment can cause a negative, self-reinforcing cycle to set in. For example, employers who would normally retain workers may be more reluctant to do so because they know that they always have the option to rehire people if business picks up.
Diamond has conducted important research on the costs involved in people searching for jobs, and the impact of those costs on employment. He co-wrote a key paper, with Olivier Blanchard, chief economist at the International Monetary Fund, on the "Beveridge Curve," which measures the relationship between the number of job openings and the unemployment rate.
There is a debate underway among economists over how much of the current employment problem is "cyclical," merely reflecting the short-run impact of the recession, and how much is "structural," meaning that it is driven by fundamental changes in how the economy works.
The major lesson of the work by the three new Nobel laureates is that the lines between these two types of employment are fuzzier than may seem obvious, and that a cyclical unemployment can become structural unemployment.
The recognition for Diamond, Mortensen, and Pissarides "can be thought of as a prize for unemployment theory," said Alex Tabarrok, a George Mason University economist, on his blog. "A key breakthrough was to realize that the problem was not how to explain unemployment per se but rather how to explain hiring, firing, quits, vacancies and job search and to think of unemployment as the result of all of this underlying microeconomic behavior."
| October 11, 2010; 1:15 PM ET
Categories: Federal Reserve, International Economics, U.S. Economy, Unemployment
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