Peter Diamond, Dale Mortensen, and Christopher Pissarides
Citation: For their analysis of markets with search frictions.
The key idea
Labour markets don't clear instantly. Workers and firms search; matches form slowly. Equilibrium involves simultaneous unemployment and vacancies. The Beveridge curve traces the relationship.
The explanation
DMP modelled labour markets as matching processes: unemployed workers and vacant jobs come together through search, and the rate of matching depends on both sides' search intensity. The framework explains why unemployment and vacancies co-exist and why labour-market reforms (unemployment benefits, hiring subsidies) have nuanced effects.
Why Africa should care
DMP is the right framework for African youth-employment policy: high unemployment co-exists with employer complaints about lack of skilled workers — a matching failure. Kenya's Ajira Digital Programme and Rwanda's YouthConnekt are search-matching interventions in DMP language. Informal-sector labour markets follow DMP dynamics with much smaller match rates and longer search durations.
How to use it
Diagnose unemployment by separating skills-mismatch (matching-function inefficiency) from aggregate-demand shortfall (low job creation). Each calls for different policy.
Canonical works
- Dale T. Mortensen and Christopher A. Pissarides (1994) "Wage Determination and Efficiency in Search Equilibrium" Review of Economic Studies
- Peter A. Diamond (1982) "Aggregate Demand Management in Search Equilibrium" Journal of Political Economy
More from Search, experiments, and climate · 2010-2019
- 2011Thomas Sargent and Christopher Sims
Sargent: rational-expectations equilibrium estimation gives us a way to recover structural parameters from data. Sims: vector autoregressions and impulse-response functions reveal causal patterns in macroeconomic data without imposing strong theoretical priors.
- 2012Alvin Roth and Lloyd Shapley
Shapley: stable matching in two-sided markets (deferred-acceptance algorithm). Roth: take the theory to the field — kidney exchange, school choice, medical residency.
- 2013Eugene Fama, Lars Peter Hansen, and Robert Shiller
Fama: efficient markets — prices reflect all available information; predicting short-term returns is essentially impossible. Shiller: prices are too volatile to be explained by fundamentals alone; behavioural and bubble-prone. Hansen: GMM — the workhorse estimator for testing asset-pricing models.
- 2014Jean Tirole
Industrial organisation needs game theory + information economics. Optimal regulation of natural monopolies requires accounting for information asymmetries between regulator and firm. Two-sided platforms (credit cards, OS) have specific competitive dynamics.
- 2015Angus Deaton
Use micro-level household survey data to measure consumption, poverty, and welfare. Aggregate statistics hide individual variation that matters for policy.