Federal Reserve board nominee Peter Diamond was honoured along with Dale Mortensen and Christopher Pissarides with the 10 million Swedish kronor (USD 1.5 million) prize for their analysis of the obstacles that prevent buyers and sellers from efficiently pairing up in markets.
Diamond - a former mentor to current Federal Reserve chairman Ben Bernanke - analysed the foundations of so-called search markets, while Mortensen and Pissarides expanded the theory and applied it to the labour market.
Since searching for jobs takes time and resources, it creates frictions in the job market, helping explain why there are both job vacancies and unemployment simultaneously, the academy 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.
Diamond, 70, is an economist at the Massachusetts Institute of Technology, and an authority on Social Security, pensions and taxation.
President Barack Obama has nominated Diamond to become a member of the Federal Reserve. However, 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 Diamond's limited experience in dissecting the inner workings of the national economy. Bernanke was one of Diamond's students at MIT. When Bernanke turned in his doctoral dissertation back in 1979, one of the people he thanked was Diamond for being generous with his time and reading and discussing Bernanke's work.
Pissarides, a 62-year-old professor at the London School of Economics, told The Associated Press that the win was "a complete surprise". "The happiness is even more when it comes as a surprise," he said, speaking from his north London home.
Pissarides said that his work had already helped shape official thinking on both sides of the Atlantic. For example, he said that the New Deal for Young People, a British government initiative aimed at getting 18-24-year-olds back on the job market after long spells of unemployment, "is very much based on our work."