Dale Mortensen, Peter Diamond, and Christopher Pissarides won the 2010 Nobel Memorial Prize in Economics for “their analysis of markets with search frictions,” the Royal Swedish Academy of Sciences announced today. Mortensen is a professor of economics at Northwestern University, Diamond is a professor of economics at MIT, and Pissarides is a professor of economics at the London School of Economics.
This year’s prize directly addresses jobs searches and unemployment, a problem that continues to plague economies across the world. Why people remain unemployed when there are job openings was something that long bothered economists. In theory, open positions and people seeking jobs should not occur simultaneously—if there is one open position and one person looking for a job, the two should find each other, ending that person’s unemployment and filling the position. In reality, matching job seekers with the correct positions is a difficult task, something many people know all too well. Known as search frictions, these difficulties in the labor market are typically related to geography and the task of searching for a job.
Diamond’s early work in the field examined other searches, said Robert Porter, a professor of economics at Northwestern. Search models were largely under-researched before Diamond published his widely-cited paper on the topic in 1982. “Diamond starts us really thinking about search models,” said Jeroen Swinkels, a professor of management and strategy at the Kellogg School. Before Diamond’s paper, economists had only been able to convincingly model a world where search didn’t exist— in that world, consumers magically know an item’s price at every store, for example. Search models allowed economists to view the world as it actually is—consumers must search different stores to find the best price, a task that is consuming.
It wasn’t until 1994 that Mortensen and Pissarides successfully extended Diamond’s model unemployment. “If you apply [Diamond’s model] to labor markets, which is what the Mortensen-Pissarides paper does, then you suddenly have a world in which you can simultaneously have unemployed people and empty jobs.”
“There were attempts” at mathematically describing simultaneous hiring, firing, and unemployment before Mortensen and Pissarides’ paper, “but this one made a big difference,” Swinkels said. Mortensen’s work also shed light on another economic riddle, the issue of wage dispersion, or why two seemingly equal workers may be compensated differently.
Mortensen is currently a visiting professor at Aarhus University in Denmark where he is continuing his work on labor market search frictions. Denmark keeps remarkably detailed data on its labor market, which Mortensen is using to study how his ideas apply at different scales in the economy.
As unemployment continues to dog economies across the globe, many economists are concerned that some of the frictions the Nobel laureates described have worsened in recent years. For example, many economists think the U.S. housing market is weighing down the nation’s labor market. American’s have been extraordinarily mobile in the past few decades when taking new jobs, something that has eased unemployment in the past. Now as people’s homes have lost value, they are more hesitant to sell their properties to relocate for a new job.
This year’s Kellogg School/Northwestern poll was remarkably prescient. Dale Mortensen was the faculty’s top pick, and Peter Diamond was the third favorite. Sandeep Baliga, a professor of managerial economics and decision sciences at the Kellogg School, predicted all three winners perfectly in a post on his blog. “The award was well deserved,” Jonathan Parker, a professor of finance at the Kellogg School, said of Mortensen’s win. “We’re still working out all the far reaching implications of his ideas.”
“It was richly deserved,” said Arvind Krishnamurthy, also a professor of finance at the Kellogg School. “It was only a matter of time before he got it.”
The Nobel Prize committee has posted a PDF detailing the science behind this year’s prize.