On 11 October 2010, the Royal Swedish Academy of Sciences announced its decision to award the 2010 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel to Peter A. Diamond, Dale T. Mortensen (both from USA) and the Cypriot Christophoros A. Pissarides “for their analysis of markets with search frictions.”

The Royal Swedish Academy highlighted: “On many markets, buyers and sellers do not always make contact with one another immediately. This concerns, for example, employers who are looking for employees and workers who are trying to find jobs. Since the search process requires time and resources, it creates frictions in the market. On such search markets, the demands of some buyers will not be met, while some sellers cannot sell as much as they would wish. Simultaneously, there are both job vacancies and unemployment on the labor market.

This year’s three Laureates have formulated a theoretical framework for search markets. Peter Diamond has analyzed the foundations of search markets. Dale Mortensen and Christophoros Pissarides have expanded the theory and have applied it to the labor market. The Laureates’ models help us understand the ways in which unemployment, job vacancies, and wages are affected by regulation and economic policy. This may refer to benefit levels in unemployment insurance or rules in regard to hiring and firing. One conclusion is that more generous unemployment benefits give rise to higher unemployment and longer search times.

This was the first time a Cypriot won the Nobel Prize. Mr. Pissarides expressed joy at the Roy- al Swedish Academy of Sciences’ decision to award him. The Professor received the news on a telephone call from Sweden, one hour before the official release of the decision to the Nobel Prize Organization’s website.Search theory has been applied to many other areas in addition to the labor market. This includes, in particular, the housing market. The number of homes for sale varies over time, as does the time it takes for a house to find a buyer and the par- ties to agree on the price. Search theory has also been used to study questions related to monetary theory, public economics, financial economics, regional economics, and family economics.”

“I did not expect it. It was big surprise, a great honor for me, my family and Cyprus and for my University. It was a great honor and it has not sunk in yet,” Mr. Pissarides said, adding that the great interest shown in Cyprus and elsewhere was a pleasant surprise.

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The President of the Republic Mr. Demetris Christofias stressed that the award of the Nobel Prize in Economic Sciences to Professor Pissarides constitutes the highest possible honor for Cyprus and its people. President Christofias praised the Cypriot born Nobel Laureate claiming that this award is an international recognition both for Mr. Pissarides’ excellent scientific work as well as for his lifetime achievements in the demanding area of Economics.

 

The Award Ceremony


Christophoros Pissarides delivered his Prize Lecture on 8 December at Aula Magna, at Stockholm University. On 10 December he received the Nobel Prize from His Majesty the King Carl XVI Gustaf of Sweden at the official Nobel award ceremony. He was introduced by Professor Bertil Holmlund, Member of the Royal Swedish Academy of Sciences and Chairman of the Economics Prize Committee. Among others, Prof. Holmlund commented:

“Peter Diamond, Dale Mortensen and Christopher Pissarides have developed a theory of markets with search frictions. This theory is relevant in many markets. For example, it applies to the housing market, where many households are searching for new homes at the same time as a large number of houses and flats are being offered for sale. Search theory can also be used to study how spatial frictions and transport costs affect residential patterns and business location decisions, and even how matching takes place in the marriage market. However, the most important application is in the labor market.

The Laureates have shown that price and wage formation in a search market may sometimes lead to outcomes that are radically different from what we would expect from conventional theory. They have also shown that resource utilisation in a search market is generally not socially efficient, since there are ‘indirect’ effects that individual agents do not take into account. If one unemployed person increases her own search activity, it will become more difficult for other job seekers to find employment. At the same time, it will be easier for a recruiting firm to fill its vacancies. Since these indirect effects are not taken into account by individual agents, there is generally scope for government intervention aimed at achieving welfare improvements.

The Laureates’ model of the labor market characterizes the search activity of the unemployed, the recruiting behaviour of firms and wage formation. The model can be used to study how the level and duration of unemployment, the number of job vacancies and the real wage are determined. For example, what role is played by the design of unemployment insurance, the efficiency of employment agencies and regulations on firing and hiring?

The effects of unemployment insurance have been extensively studied. The theory implies that more generous benefits bring about longer search time for the unemployed and higher un- employment − a relationship that has received support in many empirical studies. However, unemployment insurance can also facilitate efficient matching between job seekers and vacancies, so that the ‘right person’ ends up in the ‘right place.’

But questions about how unemployment insurance ‘should’ be designed can of course not be answered without also weighing in the fact that this insurance provides income protection to those who have been laid off. Search theory has also proved to be a highly useful tool for such welfare analyses of alternative designs of unemployment insurance.

Dear Professors Diamond, Mortensen and Pissarides, your research on markets with search frictions has had a profound impact on how economists view markets in general and labor markets in particular. You have provided detailed models of how prices and quantities are determined in markets with frictions and how frictions affect unemployment and other labor market phenomena. Your models have become indispensable tools for policy analysis and your work has initiated a large empirical literature.”

 

Biography and Work


Christophoros Pissarides was born in Nicosia in 1948. He received his B.A. in Economics in 1970 and his M.A. in Economics the following year at the University of Essex. He subsequently enrolled in the London School of Economics, where he received his PhD in Economics in 1973 under the supervision of the mathematical economist Michio Morishima.

He is currently a Professor of Economics at Lon- don School of Economics and Political Science (UK) and holder of the Norman Sosnow Chair in Economics. On January 2011 onwards he will hold the Marfin Laiki Chair at the University of Cyprus.

Mr. Pissarides was a member of the Monetary Policy Committee of the Central Bank of Cyprus (2000-2007); he has also served on the European Employment Task Force (2003) and has been a consultant on employment policy and other labor issues for the World Bank, the European Com- mission, the Bank of England and the OECD. In 2005 he was awarded the IZA Prize in Labour Economics (jointly with Dale Mortensen) for his work on unemployment and in 2008 he received the Republic of Cyprus Award for Excellence in Sciences. In 2009 he served as Vice President of the European Economic Association, to become President Elect in 2010 and President in 2011. Professor Pissarides has served as Head of the Economics Department at LSE, and he is an elected Fellow of the British Academy, the Econometric Society, the European Economic Association and the Society of Labor Economists. He is also a member of Council of the European Economic Association and the Econometric Society and a former member of Council of the Royal Economic Society. He is the Chairman of the Economica board, and a member of other editorial boards, a research fellow of the Centre of Economic Performance at LSE (and a former Head of its Macroeconomics Program), of the Centre for Economic Policy Research (London), and of the Institute for the Study of Labor (IZA, Bonn). In addition, he is a Non-National Senior Associate, Forum for Economic Research in the Arab Countries, Iran and Turkey.

Professor Pissarides is mostly known for his contribution to the search and matching theory for studying the interactions between the labor market and the macro economy. He helped develop the concept of the matching function (explaining the flows from unemployment at a given moment of time), and pioneered the empirical work on its estimation. More recently, he has done research on structural change and growth.

Pissarides’ most influential paper is arguably “Job Creation and Job Destruction in the Theory of Unemployment” (along with Dale Mortensen), published in the “Review of Economic Studies” in 1994. This paper built on the previous individual contributions that both authors had been making in the previous two decades.

The Mortensen-Pissarides model that resulted from this paper has been exceptionally influential in modern macroeconomics. In one or another of its extensions or variations, today it is part of the core of most graduate economics curricula throughout the world.

Professor Pissarides’ book “Equilibrium Unemployment Theory”, a standard reference in the literature of the macroeconomics of unemployment, is now in its second edition, and was revised after Pissarides’ joint work with Mortensen, resulting in the analysis of both endogenous job creation and destruction.


From “Cyprus Today,” Magazine, October – December 2010

 
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