Nobelists help explain how high unemployment, job openings can coexist

A trio of economics scholars, including an MIT professor whose nomination to the Federal Reserve board has been held up in the Senate, won the Nobel Memorial Prize in Economic Sciences for helping to explain such phenomena as high unemployment at a time when jobs are available.

Peter A. Diamond of MIT; Dale T. Mortensen, a Northwestern University economics professor; and Christopher A. Pissarides, a British and Cypriot citizen and professor at the London School of Economics, will share the $1.5-million award.

Their pioneering theoretical work in the 1970s and ‘80s has provided the framework for current debates over whether the government should provide more stimulus for economic growth or whether the high unemployment may be more rooted in the structure of the economy.

The Nobel committee’s selection is particularly relevant as the United States and other developed countries grapple with stubbornly high jobless rates and struggle to support economic growth without adding to huge budget deficits. U.S. unemployment has been stuck at 9.5% or higher for the last 14 months.

“The laureates’ models help us understand the ways in which unemployment, job vacancies and wages are affected by regulation and economic policy,” the Royal Swedish Academy of Sciences said in announcing the prize.

“This may refer to benefit levels in unemployment insurance or rules in regard to hiring and firing,” the statement said. “One conclusion is that more generous unemployment benefits give rise to higher unemployment and longer search times.”

The award to Diamond, 70, also amplifies the ongoing partisan battle in Washington, where Senate Republicans are holding up approval of his nomination as a Fed governor.

Republican opponents have argued that the longtime MIT professor, named by President Obama last spring to fill a vacancy at the central bank, lacks the experience to serve on the Fed’s board.

On Monday the White House held out the Nobel award as evidence of Diamond’s qualifications and accused a partisan minority in the Senate of obstructing the nomination and trying to score political points in the process.

The Senate Banking Committee’s ranking member, Richard C. Shelby (R-Ala.) — who said in August that he didn’t want a Fed member “learning on the job” — wasn’t swayed.

“While the Nobel Prize for economics is a significant recognition, the Royal Swedish Academy of Sciences does not determine who is qualified to serve on the board of governors,” he said in a statement Monday.

Diamond, for his part, said during a news conference at MIT that he was “elated, delighted, honored” by the award and that he had no plans to withdraw his candidacy for the Fed position.

Diamond received his doctorate from MIT and has been a professor there since 1966. Peers consider him a brilliant theorist whose works on taxes, pensions and social security systems are highly regarded.

The Senate Banking Committee is likely to hold a hearing on his nomination after the November midterm elections, when Diamond figures to stand a better chance for confirmation.

“I would think it would be more difficult to reject a Nobel Prize winner,” said Alice Rivlin, a former Fed vice chairman and currently a senior fellow at the Brookings Institution. “He’s a brilliant and versatile economist.”

Diamond, a former mentor to Fed Chairman Ben Bernanke, developed the theoretical foundations of so-called search markets in the early 1970s; that is, markets where buyers and sellers have difficulty finding each other because of costs, time and other factors involved in searches.

The theory has applications to housing and other areas, but the Nobel committee singled out the usefulness for assessing labor markets.

Economists said that prior to the work of Diamond, Mortensen, 71, and Pissarides, 62, the conventional economic thinking was that high unemployment was caused by weak demand and that fiscal stimulus was enough to address it.

Such a view on market behavior — that buyers and sellers would always find each other — was simplistic, something that both dissatisfied and inspired Mortensen to delve into this field.

The studies of the three men opened people’s eyes to the idea that a certain amount of unemployment would always exist, even in boom times, because workers may be in between jobs or due to mismatches in skills or employers’ preferences for distinct types of workers.

“Unemployment is clearly a pressing policy concern today and has been in many episodes in the past,” said Steven J. Davis, an expert on labor economics at the University of Chicago Booth School of Business.

“When one evaluates difficult policy proposals, it’s nice to have some way to assess benefits of policy interventions,” he said.

Their models have been used in the U.S. and elsewhere in weighing the pros and cons of policies such as increased job protection measures and expanding unemployment benefits.

The idea that more generous jobless benefits can provide a disincentive for workers to seek or take jobs has been hotly debated in the U.S. as policymakers have continued to face pressure to extend unemployment checks for millions of people.

Mortensen said his models do indeed show a negative effect of higher jobless benefits. But he dismissed that as a major factor in the current situation, saying instead that the job troubles are a function of the impaired financial markets.

Are unemployment benefits counterproductive?

“I really don’t think this is the time to worry about that,” Mortensen said.

He said he believed the current unemployment crisis reflected both structural problems — mismatches between the skills of job seekers and employers’ needs — and weak demand stemming largely from malfunctioning capital markets.

“To really bring unemployment down, we need to create service jobs,” said Mortensen, a native of Enterprise, Ore., who received his doctorate from Carnegie Mellon University.

Some economists have argued that the structural nature of the economic problems suggest that unemployment won’t be going back to the once-normal range of 5%.

Others have emphasized that the terrible labor situation demands more substantial government stimulus to bolster demand for goods and services.

Diamond acknowledged that the process of improving the job market “is going to be slow and painful” for people seeking work and for the whole economy.

But he didn’t view it as a structural problem, suggesting optimism for the future.

“I think the economy is very adaptive,” he said. “Workers and employers will adapt.”

don.lee@latimes.com