- Associated Press - Monday, October 11, 2010

STOCKHOLM | Two Americans and a British-Cypriot economist won the 2010 Nobel economics prize Monday for developing a theory that helps explain how many people can remain unemployed despite a large number of job vacancies.

Federal Reserve board nominee Peter Diamond was honored along with Dale Mortensen and Christopher Pissarides with the $1.5 million prize for their analysis of the obstacles that prevent buyers and sellers from efficiently pairing up in markets.

Mr. Diamond — a former mentor to current Federal Reserve chairman Ben S. Bernanke — analyzed the foundations of so-called search markets, while Mr. Mortensen and Mr. Pissarides expanded the theory and applied it to the labor market.

Their work, dating back to the 1970s and ‘80s, sheds light on why the classical view of markets, in which prices are set so that buyers and sellers always find each other and all resources are fully utilized, doesn’t always apply to the real world.

One example is the housing market, where buyers can struggle to find new homes even though there are a number of unsold properties available.

Another is the labor market. Because searching for jobs takes time and resources, it creates friction in the job market, helping explain why there are both job vacancies and unemployment simultaneously, the Royal Swedish Academy of Sciences said.

“The laureates’ models help us understand the ways in which unemployment, job vacancies and wages are affected by regulation and economic policy,” the citation said.

Their work resulted in the so-called Diamond-Mortensen-Pissarides model, a frequently used tool to estimate how unemployment benefits, interest rates, the efficiency of employment agencies and other factors can affect the labor market.

“One conclusion is that more generous unemployment benefits give rise to higher unemployment and longer search times,” the academy said.

Mr. Diamond, 70, is an economist at the Massachusetts Institute of Technology, and an authority on Social Security, pensions and taxation.

President Obama nominated Mr. Diamond to become a member of the Federal Reserve, but the Senate failed to approve his nomination before lawmakers left to campaign for the midterm congressional elections.

Senate Republicans have objected to what they see as Mr. Diamond’s limited experience in dissecting the inner workings of the national economy.

“I hope he will be confirmed by the Senate as quickly as possible,” Mr. Obama said in a statement congratulating Mr. Diamond and the other two laureates.

Mr. Bernanke was one of Mr. Diamond’s students at MIT. When Mr. Bernanke turned in his doctoral dissertation in 1979, one of the people he thanked was Mr. Diamond for being generous with his time and reading and discussing Mr. Bernanke’s work.

Mr. Diamond said he was returning to his suburban Boston home from New Zealand when he found out about the prize. His wife and son picked him up from Logan Airport and he got a phone call from a friend.

“Fortunately, I was sitting down and wasn’t behind the steering wheel,” Mr. Diamond said.

“It kind of takes your breath away, you suddenly realize that not only is it the moment, but also there are all sorts of changes in your life, opportunities opening up, all sorts of things that are going to be different,” he said at a news conference later at MIT.

He said the U.S. stimulus spending last year helped prevent much higher unemployment, and a second round would also be beneficial.

Mr. Pissarides, a 62-year-old professor at the London School of Economics, was the first Nobel winner with Cypriot citizenship, academy spokesman Erik Huss said.

Speaking from his North London home, Mr. Pissarides told the Associated Press the announcement came as “a complete surprise” though his work had already helped shape thinking on both sides of the Atlantic.

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