JEFFREY BROWN: Finally tonight: the 2010 Nobel Prize for Economics. It was awarded today to two Americans, Peter Diamond of MIT and Dale Mortensen of Northwestern University, and to Christopher Pissarides a British-Cypriot economist.
Diamond got the news as he returned home to the Boston area from an overseas trip.
PETER DIAMOND, winner, Nobel Prize in Economics: Fortunately, I was sitting down and I wasn’t behind the steering wheel.
PETER DIAMOND: And it kind of takes your breath away. It’s just — you suddenly realize, not only is it the moment, but also there are all sorts of changes in your life, opportunities opening up, all sorts of things that are going to be different.
JEFFREY BROWN: Diamond and his colleagues were recognized for research into why markets often don’t work as expected, particularly the job market.
Joining us to explain is Catherine Rampell of The New York Times.
Catherine, the economist won for work in so-called search theory.
CATHERINE RAMPELL, The New York Times: Right.
JEFFREY BROWN: Can you give us the layman’s definition of that?
CATHERINE RAMPELL: Basically, that refers to research about markets where buyers and sellers don’t automatically find each other.
And that really refers to almost all markets, except for things like commodities. So, in the job market, that means, why does it take so long for people who are unemployed to find jobs, even when there are job openings available?
JEFFREY BROWN: All right, so that’s a particularly relevant question right now. What — tell us what the research suggests about the situation as these economists studied it, but also as it applies to what we’re looking at now.
CATHERINE RAMPELL: Well, basically, they were interested in, again, why does it take so long for people to be matched to jobs?
And their conclusion had a lot to do with the fact that people are not interchangeable units. You know, different people have different skills. They have different weaknesses. They have different strengths. And jobs, for that matter, are also not identical, cookie-cutter things.
So, what happens is, it takes time for the right person to be matched to the right job. And, beyond that, there are government policies that at times can make the search process less efficient.
So, when we’re talking about what’s going on now, a lot of that has to do with the demand picture, but it can also have are to do with the fact that it takes time for people to be matched to the right job, because they’re unwilling to move, if their house is underwater, for example.
JEFFREY BROWN: Well, explain for — again, for the layman, why is that a sort of aha? That is as opposed to what economic theory should tell us about matching people to jobs?
CATHERINE RAMPELL: I know, it sounds pretty intuitive, right? But, back in the ’70s, it was actually quite controversial, in part because there was this idea that markets were efficient, that, you know, why doesn’t the wage just drop, so that a company sees a new hire as more attractive and a person who is unemployed will just take the job because they need the job?
What happened was, around the time of the ’70s, there was this more expansive, more nuanced thinking about the fact that markets where goods are not totally interchangeable — in this case, goods are people — means different things.
And how do you sort of characterize what takes so long? How are people different? How does the fact that when people get discouraged about finding a job affect the likelihood of their being placed in a job?
So, a lot of what’s interesting about this research is just that it sort of expanded what people thought about when they thought about economics and how to think about the job market. But, beyond that, it’s also been applied — the same types of principles have been applied to the housing market, to finance, to marriage, to all sorts of different things.
JEFFREY BROWN: Now, are there applications or implications for government policy in all of this?
CATHERINE RAMPELL: There are a few.
Well, I mean, there’s — there’s been a lot of research in this vein, especially more recently. But one of the key points from their — from these three researchers’ work is that sometimes government policies can have unintended consequences.
The big example that a lot of, I’m sure, anti-stimulus people would like to cite is unemployment benefits. Unemployment — unemployment benefits are given for many different reasons, including compassion. But one effect of that is, at least at the margins, if you’re paid not to work, then that means you have slightly less incentive to go out and find a job.
So, that’s the kind of policy that we’re talking about.
JEFFREY BROWN: As you say, that’s been…
CATHERINE RAMPELL: One…
JEFFREY BROWN: Excuse me. But, as you say, that’s been part of the discussion we have been having on this program and in the debate in Washington, right?
CATHERINE RAMPELL: Absolutely.
JEFFREY BROWN: Yes.
CATHERINE RAMPELL: Mm-hmm. But that’s not the only thing that their work touches on.
You know, I — I had the opportunity to listen in on or talk with or — listen in on press conferences or talk with each of the winners today. And all of them were asked about what the implications of their work was for current policy.
And at least two of the three strongly emphasized the fact that we really want people to be put back to work as quickly as possible, because, the longer they’re out of the labor force, the harder it is to get them back to work. They become detached from work. Their skills might deteriorate. They might be stigmatized. There are all sorts of bad things that can happen.
And they — and they talk about how their work has this — basically shows that, the longer you’re apart from the labor force, the sort of more entrenched that undercurrent of unemployment becomes. And this is one of the problems that Europe faced, let’s say, in the ’70s and ’80s, where they had this sort of underclass of chronically unemployed people.
JEFFREY BROWN: There is a kind of interesting — before I let you go, an interesting sidebar to all this. One — perhaps best known of the winners is Peter Diamond.
CATHERINE RAMPELL: Right.
JEFFREY BROWN: He’s been nominated to be on the Federal Reserve Board, right?
CATHERINE RAMPELL: Absolutely. And I’m sure this is a happy day for him on many levels. But one particularly ironic level, I guess, is that he was nominated back in April. And his nomination was effectively blocked by the Republicans in the Senate, in part because some Republicans, including Richard Shelby, had said that he was too inexperienced, that they didn’t want someone on the Fed who was — quote — “learning on the job.”
So, you know, this is a nice little comeuppance, I’m sure, for Professor Diamond today to be able to say, yes, you know, I have some credentials under my belt.
And, actually, he was re-nominated a couple of weeks ago. And there is an implication that this little plaudit on his resume might help him more smoothly get through the confirmation process.
JEFFREY BROWN: They also saw he has a good sense of humor. He said, this was almost as good — I think he said it’s almost as good as 2004, when the Red Sox finally won the World Series, right?
CATHERINE RAMPELL: Right.
JEFFREY BROWN: He’s a big Red Sox fan.
CATHERINE RAMPELL: He’s a big Red Sox fan. He actually threw out the opening pitch a couple months ago, I think.
JEFFREY BROWN: Oh, bigger than I knew.
OK, Catherine Rampell…
CATHERINE RAMPELL: Yes.
JEFFREY BROWN: … The New York Times, thanks very much.
CATHERINE RAMPELL: Thank you.