The Beveridge curve is suggesting a less efficient labour market but the deterioration is temporary

A close examination of the empirical relationship between job openings and the unemployment rate reveals that the labour market is less efficient compared to, say, five years ago. But on a temporary basis the Beveridge curve does appear to shift outwards in the earlier stages of every business cycle. So NAIRU may well have risen somewhat in recent years, but there are reasons to take the optimistic view that it should decline towards 5 per cent over time.
Since the recovery began three years ago, job openings in the United States have risen and are currently not too far away from the level prevailing just before the 200809 recession. Meanwhile the vacancy rate – defined as job openings divided by the labour force – is following the trend in job openings and has recovered significantly too. The vacancy rate was 2.6 percent in the third quarter.


shift suggests that the labour market is less efficient in matching workers with jobs. Several factors may explain the shift, among which changes in demographics, changes in unemployment insurance benefit systems and skill mismatches are often cited. Moreover, an outward shift in the Beveridge curve could also be suggesting that the structural unemployment rate or the natural unemployment rate – the rate where the labour market is in equilibrium and inflation is stable – has increased at least on a temporary basis. Four years ago a vacancy rate of 2.5 per cent was consistent with an unemployment rate of around 6 per cent, but the corresponding unemployment rate is 2 percentage points higher today.

The reason we care about these numbers is because historically there has been a tight relationship between the vacancy rate and the unemployment rate, also known as the Beveridge curve. However since the recovery began, the unemployment rate has risen for any given vacancy rate; i.e. the Beveridge curve has shifted outwards over the last few years. An outward

Basically since the recovery began, job openings have recovered significantly faster than the unemployment rate. The housing downturn could have something to do with it. Millions of unemployed workers are still stuck in “negative equity” on their homes and thus unable or unwilling to move to where the jobs are. This could have pushed up the non-accelerating inflation rate of unemployment (NAIRU), a measure of equilibrium unemployment.

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Economic Insights

But the current high unemployment rate is primarily due to cyclical factors and this low matching efficiency is transitory, in our view. What the most recent research is suggesting is that the outward shift is a timing issue; vacancies are simply posted before actual hiring occurs. Moreover, the Beveridge curve does appear to shift outward in the earlier stages of every business cycle only to move inward again when the recovery gets going. So even though NAIRU may well be somewhat higher today compared to five years ago, there are reasons to take the optimistic view that NAIRU should decline towards 5 per cent over time. EDITORS Mattias Bruér & Tomas Lindström +46 8 763 85 06, + 46 8 763 80 28


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