Diamond wins Nobel, but still blocked on Fed job

[October 12, 2010]  WASHINGTON (AP) -- Peter Diamond's research on unemployment is good enough to earn him the Nobel Prize in economics -- but not to get him on the Federal Reserve.

Diamond, an economist at the Massachusetts Institute of Technology, and two other economists were honored Monday for their work in explaining why unemployment can remain high despite large numbers of job openings -- a trend that is playing out today.

The other economists were Dale Mortensen, an economics professor at Northwestern University, and Christopher Pissarides, a professor at the London School of Economics. The three men will share the $1.5 million prize.

President Barack Obama nominated Diamond to the Fed in late April. But Senate Republicans have blocked his nomination, questioning his practical experience, as well as the conclusions of his research.

In the early 1980s, Diamond wrote a paper that found federal unemployment insurance helps companies land job seekers with the right skills by allowing the unemployed to hold out for the right opportunity.

Some Republicans argue that extending unemployment benefits -- as Congress has done on multiple occasions since the recession -- can actually make unemployment worse by taking away the incentives to finding work. Liberal economists dismiss that.

Sen. Richard Shelby of Alabama, the senior Republican on the Senate Banking Committee, has been blocking Diamond's nomination to the Fed for months. Shelby says Diamond lacks expertise in so-called monetary policy -- the setting of interest rates and other tools that are used to influence the nation's economic growth, employment and inflation.

"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 of the Federal Reserve System," Shelby said Monday.

Obama said Monday he hopes the Senate will confirm Diamond. The president said he tapped Diamond for the Fed job to "help bring his extraordinary expertise to our economic recovery."

The Royal Swedish Academy of Sciences said it chose Diamond, Mortensen and Pissarides for work that helps economists and others "understand the ways in which unemployment, job vacancies and wages are affected by regulation and economic policy."

The New Deal for Young People, a British government initiative aimed at getting 18- to 24-year-olds back on the job market after long spells of unemployment, "is very much based on our work," said Pissarides, 62. "The ways of dealing with this need not be expensive training -- it could be as simple as providing work experience," he said.

Dating back to the 1970s and 1980s, their work gave economists a new way to look at unemployment trends. They focused on factors such as the skills job seekers have, how they hunt for jobs and the needs of employers. Their work challenged the classical view of markets, where buyers and sellers always find each other. In the real world, sometimes they don't, the Nobel winners found.

Job seekers and job providers, for instance, can encounter obstacles along the way. The skills workers have may not match the skills employers want. Job seekers may not be able to move to a new city for work. Some applicants may jump at the first offer they get, even though it's not the best match.

Their work resulted in the so-called Diamond-Mortensen-Pissarides model, a frequently used tool to estimate how unemployment benefits, interest rates, the efficiency of employment agencies and other factors can affect the labor market.

Taken together, their work has suggested, for instance, that unemployment benefits can have the unintended consequences of prolonging unemployment. That's because the aid can make it less costly to be out of work -- even as it improves employers' chances of finding the right workers, as Diamond's research concluded.

Diamond wrote that workers "become more selective in the jobs they accept" because of the employment aid. In the long run, he found, that makes for better matches and increases the economy's efficiency because companies and workers are better suited to one another.

An authority on Social Security, pensions and taxation, Diamond, 70, was a mentor to Fed Chairman Ben Bernanke while he was a student at MIT.

Mortensen, 71, is a visiting professor at the University of Aarhus in Denmark.

"Diamond is a giant in economics," said Anil Kashyap, professor of economics and finance at the University of Chicago Booth School of Business. "To argue that he is not qualified to be a member of the Federal Reserve is just crazy,"

[Associated Press; By JEANNINE AVERSA, LOUISE NORDSTROM and KARL RITTER]

Associated Press writers Malin Rising in Stockholm; Jan M. Olsen in Copenhagen, Denmark; Raphael Satter and Jane Wardell in London; Mark Pratt in Boston; and Menelaos Hadjicostis in Nicosia, Cyprus, contributed to this report.

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