In 1997 Murphy was awarded the prestigious John Bates Clark Medal by the American Economic Association, given once every two years to the most outstanding American economist under the age of forty, and widely considered to be the second most prestigious prize in economics (after the Nobel Prize in Economics). Murphy was cited for his study of the causes of growing income inequality between white-collar and blue-collar workers in the United States and his research linking the growth in income inequality to growth in the demand for skilled labor. His other research has covered such topics as economic growth, income inequality, valuing medical research, rational addiction, and unemployment.
Murphy has authored over 50 published articles on a variety of topics including a cost–benefit analysis of the war in Iraq.
On September 20, 2005, he was named as one of the 2005 recipients of the MacArthur Fellowship, often referred to as the "genius grant."