The 2010 Nobel Prize in Economics: How the DMP Model Explains Current High Unemployment

Stockholm’s recognition of the combined contributions of Peter Diamond, Dale Mortensen, and Christopher Pissarides brought immense pleasure and satisfaction to the macro-labor research community. The DMP model honored by the prize is a central component of modern macroeconomics. Given the current high unemployment rates in most advanced economies, it seems natural to focus my remarks about the DMP model on how the model explains current high unemployment. I’ll start with a simple exposition of the model. The contributions of the three creators of the model are so intertwined that I will avoid the attempt to describe which member of the team created any individual element of the model. Focusing on the current applications of DMP is the best way to make the point that this line of research, dating back to the late 1960s, is still current and vital and making even more progress. The DMP model of unemployment is widely accepted as the most realistic account of unemployment based on a careful and full statement of the underlying economic principles governing labor turnover, job-finding rates, and wage determination. Its building blocks are (1) a stochastic model of labor turnover, where workers separate from jobs, become unem-