Three academics on Oct. 11 were awarded the Nobel memorial prize for economics for research into the problems of matching supply and demand in labor, pioneering insights that parallel the evolution of investment theory away from efficient market assumptions.
The recipients were Peter A. Diamond, institute professor and professor of economics emeritus at the Massachusetts Institute of Technology; Dale T. Mortensen, the Ida C. Cook professor of economics at Northwestern University; and Christopher A. Pissarides, professor of economics and the Norman Sosnow Chair in Economics at the London School of Economics and Political Science, the Royal Swedish Academy of Sciences announced.
The three will share a prize of $1.5 million, the academy said in a statement.
Mr. Diamond is a nominee to the Federal Reserve Board; his appointment is being held up by Senate Republicans.
The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel recognized their work in theory involving the costs to markets associated with searches by buyers and sellers.
Their research and model helps explain why there are “so many people unemployed at the same time that there are a large number of job openings” and how economic policy affects unemployment, according to the statement.
Their work “is also applicable to markets other than the labor market,” the statement said.
Bruce I. Jacobs, principal, Jacobs Levy Equity Management, said the Nobel winners' work is an example of how labor and financial markets economics have evolved to more realistic approaches from theoretical ones.
The Nobel winners' labor market models “have moved on from the assumption of perfect markets — with instantaneous and costless information about job opportunities and candidates — to more realistic models, which incorporate the costs incurred by prospective employees and employers as they search for better information on which to base decisions,” Mr. Jacobs wrote in an e-mail response for comment on the award. “Such insights have provided more accurate unemployment forecasts and more informed policy responses.
“Similarly, financial market economics no longer relies on the simplistic and naive assumptions of the super-perfect efficient market, which assumes instantaneous, continuous, and costless information is known to all investors, who thus have the same expectations regarding each stock and incur no costs as they trade,” Mr. Jacobs wrote.
“Rather, more recent financial market theory benefits from realistic assumptions: that information on security valuation is costly to obtain, that events are discrete and not necessarily continuous, that investors have different expectations regarding stock valuations, and that transaction costs are non-trivial. These real-world characteristics of financial markets can cause disequilibrium, leading to dramatic market downturns as in 1987, 1998, and 2008.”
Francisco Torralba, an economist at Ibbotson Associates, said the winners' work has value to investors for its macroeconomic explanation of the unemployment rate and policies and how they affect economic growth and the financial markets.
“Unemployment is negative for the economy because it increases uncertainty among consumers and investors and depresses demand,” Mr. Torralba said in an interview.
The three new Nobel laureates refute “conventional wisdom that more generous unemployment insurance benefits lead to higher unemployment because the unemployed don't have as much incentive to look for a job,” Mr. Torralba said.
They “point to a paradox about unemployment insurance,” Mr. Torralba said.
“More generous unemployment insurance might actually lead people to accept risky jobs they might otherwise not accept,” if they know they will have a safety net of unemployment insurance, if they lose the job.