CAMBRIDGE, Mass./STOCKHOLM (Reuters) - A British-Cypriot and two Americans, including one nominated by U.S. President Barack Obama to the Federal Reserve board, won the 2010 economics Nobel on Monday for work helping explain unemployment and job markets.
The work honored is highly topical since many countries with developed economies, including the United States, are worried about future job growth after the worst global crisis since the Depression.
The Royal Swedish Academy of Sciences awarded the 10 million crown ($1.5 million) prize to U.S. professors Dale Mortensen and Peter Diamond, the 70-year-old nominee to the Fed, as well as British-Cypriot Christopher Pissarides, 62.
The men’s work on search markets helped explain how it was possible so many people could be unemployed at a time when a large number of jobs were on offer.
“Search theory has emerged as the predominant model for considering the effects of economic-policy measures on the labor market,” the committee said in a statement.
These measures include the size of unemployment benefits and rules on hiring and firing.
“Clearly the theory does not offer very simple prescriptions for how to return to full employment,” Tore Ellingsen, a member of the prize committee, said.
“On the contrary, the theory explains why it is so hard when you have had a shock, an economic shock, like we have just had, why it takes so long to get back to full employment,” he told a news conference.
The trio explained how buyers and sellers -- or in this case, employers and potential employees -- did not always find one another immediately, leading to so-called “frictions.”
This search process meant there would inevitably be job vacancies and unemployment.
“According to a classical view of the market, buyers and sellers find one another immediately, without cost, and have perfect information about the prices of all goods and services ... But this is not what happens in the real world,” the prize committee said in a statement.
The citation said Diamond, a professor at the Massachusetts Institute of Technology, had analyzed the foundations of search markets.
Diamond said he thinks stubborn unemployment will decline slowly.
“With suitable macroeconomic policies, there’s no reason to think that once we get through this we won’t get back to normal unemployment,” he told a media conference at MIT.
“We’re starting from a place with unusually high unemployment. The process is going to be slow and that’s painful for the entire economy,” he said.
Diamond said a second stimulus bill “would be valuable” especially if the federal government helped state and local governments save teachers, firefighters and police.
Obama last month denominated Diamond to a seat on the Fed board after the U.S. Senate in August returned the nomination to the White House.
Pissarides told a news conference by telephone he felt “a mixture of surprise and happiness” about the award.
“It felt so great that you didn’t believe it will ever happen until after you had been told it will happen. It is a great honor for me. It is such a big honor for me personally.”
Pissarides said he wanted to study this problem to contribute something to society and work in an area that was a real difficulty, and where economists could help.
Mortensen, 71, professor at Northwestern University, and Pissarides at the London School of Economics and Political Science, expanded the theory and applied it to labor markets.
Mortensen, in Denmark as a visiting professor, told Danish TV that even though his research came out of the oil crisis of the 1970s, its “frameworks” prepared him to ask the right questions about the recent financial crisis.
“The right question now is, how did and does the financial crisis affect actors in the labor market, and the most direct effect of course is on employers. If they have problems financing new jobs, creating new jobs, that will be one of the causes for reduction in vacancies and increase in unemployment.”
The economics prize, officially called the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, was established in 1968. It is not part of the original group of awards set out in dynamite tycoon Nobel’s 1895 will.
Last week’s string of prizes culminated in jailed Chinese democracy activist Liu Xiaobo winning the Nobel Peace Prize for two decades of nonviolent struggle for human rights -- an award that has raised the ire of China.
Additional reporting by Simon Johnson and Patrick Lannin; Editing by Charles Dick and Philip Barbara