Spot-on, for once

Economics Nobel: The 2010 Nobel award for economics nails the top problem in the world economy. Peter Diamond, Dale Mortensen and Christopher Pissarides were rewarded for their work on impediments to efficiency in employment markets, for instance the costs for the unemployed of seeking jobs. That’s highly relevant to today’s economy – and to Diamond’s proposed US Federal Reserve governorship, a role for which President Barack Obama nominated him in April.

In 1982, Diamond wrote one of the first papers showing that search costs in job markets might lead to a steady-state level of unemployment. This led to the Diamond-Mortensen-Pissarides model, which describes the search activities of the unemployed, the recruiting behaviour of companies, and wage determination. The model can be used to estimate the effects of different labour market factors - things such as unemployment insurance, interest rates, and hiring and firing costs – on the level and average duration of unemployment, vacancy levels and real wages.

Unlike some recent Nobel awards, the work of this year’s laureates is highly relevant amid a deep downturn that has lasted longer than any in recent decades and brought high levels of long-term unemployment. The traditional relationship between vacancies and employment appears to be breaking down in the United States, with vacancy rates increasing in recent months without a corresponding drop in unemployment.

The US central bank is charged with maintaining full employment as well as low inflation. That makes the Senate’s rejection of Diamond as a Fed governor on the grounds that he did not have sufficiently broad macroeconomic experience, the reason given by Senator Richard Shelby, seem bizarre. Diamond may or may not have workable solutions to the problem of unemployment, but he is fully qualified to ask the right questions and focus attention on the labor market’s deficiencies.

The Royal Swedish Academy of Sciences got it right this time by lauding economists working on one of today’s most relevant problems. Diamond’s nomination for the Fed is still outstanding; the Senate now has a good excuse to drop its silly opposition to his appointment and let him try to put some jobs into the recovery.