Federal Reserve board nominee Peter Diamond was honored along with Dale Mortensen and Christopher Pissarides with the 10 million Swedish kronor ($1.5 million) prize for their analysis of the obstacles that prevent buyers and sellers from efficiently pairing up in markets. Diamond — a former mentor to current Federal Reserve Chairman Ben Bernanke — analyzed the foundations of so-called search markets, while Mortensen and Pissarides expanded the theory and applied it to the labor market.
Their work sheds light on why the classical view of markets, in which prices are set so that buyers and sellers always find each other and all resources are fully utilized, doesn't always apply to the real world. One example is the housing market, where buyers can struggle to find new homes even though there are a number of unsold properties available. Another is the labor market.
Because searching for jobs takes time and resources, it creates friction in the job market, helping explain why there are both job vacancies and unemployment simultaneously, the academy said.
"The laureates' models help us understand the ways in which unemployment, job vacancies and wages are affected by regulation and economic policy," the citation said.
