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Nobelist Has His Day in Evanston

Conference focuses on why Dale Mortensen’s research has made such a difference

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April 26, 2011

By Howard Wolinsky

EVANSTON, Ill. --- Northwestern University's Dale T. Mortensen has been recognized numerous times since the October announcement of his Nobel Prize in economics -- especially during all the pomp and ceremony of Nobel Week in Sweden last December.

But a recent two-day symposium (April 15 and 16) in which Mortensen was honored by peers on Northwestern’s Evanston campus perhaps best brought to life why his pioneering research has made such a difference in academia and policy circles.

More than 160 colleagues, including leading academics, policymakers and former students, gathered at the James L. Allen Center to focus on Mortensen’s research during the conference, co-sponsored by Northwestern and the Federal Reserve Bank of Chicago.

Mortensen, the Ida C. Cook Professor of Economics at Northwestern’s Judd A. and Marjorie Weinberg College of Arts and Sciences, received the Noble Prize in economics, with colleagues Peter Diamond, Massachusetts Institute of Technology, and Christopher Pissarides, London School of Economics and Political Science in the United Kingdom. Honored in Stockholm Dec. 10 by His Majesty King Carl XVI Gustaf of Sweden, the three shared a $1.5 million prize.

The framework they developed seeks to explain why unemployment rates can remain high in the face of large numbers of job vacancies. Mortensen pioneered the theory of job search and search unemployment, extending it to study labor turnover.

The so-called DMP model (based on the three Nobel Prize winners’ initials) helps show the ways in which unemployment, job vacancies and wages are affected by regulation and economic policy and also can be applied to other areas, including the housing market.

Martin Eichenbaum, the Ethel and John Lindgren Professor of Economics at Northwestern and a consultant to the Federal Reserve Banks of Atlanta and Chicago, moderated a panel discussion titled “Macroeconomic Policy and Labor Markets: Lessons from Dale Mortensen’s Research,” a highlight of the conference.

“The DMP model gives us a handle on the kind of cost or friction that allows us to think concretely about observations about why people are looking for jobs at the same time as firms are looking for people,” Eichenbaum said in an interview. It shows that labor markets are different from traditional commodity markets, such as wheat “where everyone knows about the object being traded, and there aren’t any important frictions to trade,” he said.

Until five years ago central banks followed a simplistic approach to modeling the labor market, according to panelist Lawrence Christiano, the Alfred W. Chase Professor of Business Institutions in the Weinberg College of Arts and Sciences and professor of finance at the Kellogg School of Management at Northwestern.

That all changed as the banks hired new Ph.D.s acquainted with the latest ideas on modeling, he said, and central banks have become the largest “non-academic consumers” of the DMP framework. “You’ll find that the DMP approach to labor markets is now the gold standard at the central banks,” said Christiano, a consultant to the Federal Reserve Banks of Chicago, Atlanta and Minneapolis. “They’re all talking Dale-speak. They’re all talking about the search by workers for jobs and search by firms for workers.”

Mortensen, who was in the audience, responded to the panelists’ comments. “When you’re at a certain stage of your career, it is very gratifying to have your students and close colleagues share what they may have gotten out of your research,” he said during a break.

Panelist Robert E. Hall, an economist at Stanford University, said in an interview that the DMP model’s theory of unemployment has had a major impact on economists looking at labor markets. “It’s a theory that has deeply informed all the work that modern economists do on unemployment,” said Hall, the immediate past president of the American Economic Association. “It’s sort of the automatic way all of us think about any puzzle that comes up.”

The model is taught routinely in economics graduate programs. “We all teach it to first-year graduate students,” Hall said. “It’s just a fundamental part of modern economic analysis.”

He noted that every labor economist who works with the federal government has studied the model carefully.

During a break, Gadi Barlevy, a senior economist and research advisor in the economic research department at the Federal Reserve Bank of Chicago and a former assistant professor of economics at Northwestern, said that the Federal Reserve Bank policymakers took into account the Mortensen framework during the recent financial crisis.

“So Dale’s ideas are very important,” Barlevy said. "I can attest from first-hand experience that the model was directly used in trying to get disciplined and formalized thinking about the issues [in analyzing how the Federal Reserve should respond to the financial crisis].”

Principal topics of Mortensen’s current research include the development of equilibrium dynamic models designed to account for wage dispersion, the time series behavior of job and worker flows, and the role of reallocation in the determination of aggregate growth and productivity.

So, what is Mortensen’s own view of the research that has catapulted him into the international limelight? He said the DMP model provides a lens to evaluate a variety of policy alternatives, rather than providing definitive answers. “The framework itself doesn’t say anything about what should be done,” he said. “And different people, all of whom use the model, have come up with different alternatives. The framework does not give you an answer. It only gives you a way to think about what the answer might be.”

Following the conference, Mortensen discussed his work at “A Day With Northwestern,” sponsored by the Northwestern Alumni Association.

Howard Wolinsky is a freelance writer based in Chicago.