by Calculated Risk on 10/11/2010 03:22:00 PM

A couple of reviews and explanations of the work of Peter Diamond, Dale Mortensen and Christopher Pissarides ...

From Edward Glaeser at Economix: The Work Behind the Nobel Prize

This year’s Nobel Memorial Prize in Economic Science ... was awarded today to Peter A. Diamond, Dale T. Mortensen and Christopher A. Pissarides for their research on “markets with search frictions,” which means any setting where buyers and sellers don’t automatically find each other. Search models are relevant in many settings, including dating, used cars and housing, but above all, these models help us make sense of unemployment.
...
Professor Diamond’s ... work was distinguished both by elegant modeling — building the theoretical tools needed to make sense of labor turnover—and important insights. Perhaps the key idea is the “search externality,” the idea that each “additional worker makes it easier for vacancies to find workers and harder for other workers to find jobs.” ... Whenever one worker passes up a job, that worker makes finding a job easier for other workers. This insight led to Professor Diamond’s conclusion that higher levels of unemployment insurance could improve the workings of the labor market by making some workers pass up marginal jobs.
...
The work of these economists does not tell us how to fix our current high unemployment levels, but it does help us to make some sense of our current distress. Their models tell us that common wisdom — like the belief that higher unemployment benefits always increase unemployment — may be wrong and that policies that improve matching may have great value. Rarely has the prize committee been better able to match the honored work with the moment.

And more from Paul Krugman: What We Learn From Search Models

With regard to current concerns, probably the most relevant paper is Blanchard and Diamond on the Beveridge Curve — the relationship between job vacancies and unemployment. ... It shows that structural unemployment is a real issue, and that the volume of structural unemployment shifts over time. It also shows, however, that short-term movements in unemployment are overwhelmingly the result of overall shocks to demand ...

And from Catherine Rampell at the NY Times: 3 Share Nobel Economics Prize for Labor Analysis

In a telephone interview with reporters at the Nobel news conference in Sweden, Professor Pissarides said he thought the work being honored had one lesson in particular for today’s policy makers: “What we should really be doing is make sure the unemployed do not stay unemployed for too long, to try to give them direct work experience,” so that they “don’t lose their attachment to the labor force.”

Professor Diamond, in a news conference at M.I.T., echoed his colleague’s advice about getting people back to work as quickly as possible, but said fears about permanently higher unemployment rates and structural displacement of workers were overblown.

“I think the economy is very adaptive,” he said. “Workers and employers will adapt to what will make the economy function. I see no reason why, once we get fully over this, we won’t go back to normal times,” with more “normal” unemployment rates.