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Labour market specialists wins Economics prize

Trio helps explain how unemployment, job vacancies, and wages are affected by regulation and economic policy.

Peter Diamond's research key in post-recession
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The story of non-economist Elinor Ostrom

Peter Diamond and Dale Mortensen of the US and British-Cypriot Christopher Pissarides won the 2010 Nobel Economics Prize on Monday for helping explain why supply and demand do not always meet in the labour market and elsewhere.

The Nobel jury lauded the trio "for their analysis of markets with search frictions," which helps explain how unemployment, job vacancies, and wages are affected by regulation and economic policy.

The winners have had a big impact on the way policymakers look anew at benefits for the unemployed and what can best be done to match them up to jobs.

The choice of the winners is set against greatly increased pressures on governments to revisit their benefits and labour market policies, amid a post-crisis rise in unemployment and greatly increased pressures on state budgets.

Reached by telephone in London, 62-year-old Christopher Pissarides of the London School of Economics and Political Science said he reacted to Monday's news with "a mixture of surprise and happiness and general satisfaction."

He said he started research in his field and the moment unemployment in Europe was rising, and he foresaw it becoming a "very big" problem.

"This is what I wanted to study, to contribute something to society," he said.

"Once I started, I realised that the models we had to study unemployment were not very well suited to the problems we were facing, and I started working on these new models that led to the prize now," he added.

At INSEAD business school near Paris, assistant professor of economics Amine Ouazad, said that the award marks "their major contribution" to the study of how the labour markets work, especially on the "frictions and structural rigidities" which prevent their smooth working.

For example, some people believe the minimum wage to act against employment because it increases labour costs but this is "not what has been observed in many states."

He said: "Their work helps us to understand why an increase in wages gives an increase in employment, contrary to what might have been expected." In other words, more workers are encouraged to look for work by higher wages.

He explained that "their work has become central" for looking at how labour markets work. "It has become the foundation for designing appropriate unemployment benefits and showing how demands on job seekers should increase over time."

The presentation of the prize noted that according to traditional theory, labour markets should work on their own, with job seekers finding available jobs, thus creating balance.

The three Nobel laureates however help show with their model -- the Diamond-Mortensen-Pissarides, or DMP model -- that markets do not always work that way and that "finding the right match" can be elusive.

Owing to small glitches, buyers may find it difficult to find sellers and job seekers may not find the employers looking to fill a position.

For instance, a small cost faced by employers looking for labour may mean they decide not to take on workers even though they need them.

The trio's model helps explain why unemployment persists and proves stubbornly resistant even when economic circumstances improve.

"In this theory, incentives in job search and recruitment are crucial determinants of unemployment as well as other labour market phenomenon," Bertil Holmlund of the Royal Swedish Academy of Sciences said in explaining the committee's choice.

The laureates' work also helps identify areas for government policy action, pinpointing for instance what governments can do to improve employment and prevent long-term unemployment through training.

The jury noted the trio's work in search theory can also be applied to a number of other areas besides the labour markets, including the housing market and public economics.

Diamond, 70, is associated to the Massachusetts institute of Technology, Mortensen, 71, is associated to Northwestern University.

The Economics Prize is the only one of the six Nobel prizes not created in Swedish industrialist Alfred Nobel's 1896 will. It was introduced in 1968 to celebrate the tricentary of the Swedish central bank and was first awarded in 1969.

Last year, Elinor Ostrom -- the first woman to ever win -- and Oliver Williamson of the United States won the Economics Prize for their work on the organisation of cooperation in economic governance.

The 2010 Nobel season peaked on Friday with the awarding of the prestigious Peace Prize to jailed Chinese dissident Liu Xiaobo, which sparked calls for his release from the West and a furious condemnation by China.

Last Updated (Monday, 11 October 2010 15:31)


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