For decades, the researchers have studied what happens when a market is not made up of identical, cookie-cutter units — as is the case with the job market, where workers have different skills and weaknesses, and where all companies have different types of jobs they need to fill. In many cases, there are significant search costs to finding the ideal match between a buyer and a seller of a good, like the job to a job-seeker.
Professor Diamond, 70, an MIT professor and a nominee to the Federal Reserve Board who was effectively blocked by the Senate earlier this year, first developed a broad theoretical framework for studying markets with search costs in 1971. Professors Mortensen, 71, of Northwestern University, and Pissarides, 62, of the London School of Economics, later worked with Professor Diamond to apply this theory to the labour market in particular, and how government policy could improve the matching of workers to jobs.
Timely work
“The models help us understand the ways in which unemployment, job vacancies, and wages are affected by regulation and economic policy,” according to prize committee.
The work is considered by many researchers to be particularly timely in today’s economic climate, in which many developed countries like the United States are facing stubbornly high unemployment rates. For example, the theory developed by the three economists has been used to try to design alternative unemployment benefit systems, and to determine how hiring and firing costs affect the unemployment rate.
Theories about search in markets have also been applied to many other areas, like housing, public economics and family economics.
