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Blogs review: The shift in the Beveridge curve

What’s at stake: The traditional interpretation of shifts in the Beveridge curve – the relationship between the vacancy rate (jobs openings/labor force) and the unemployment rate – as increases in the structural level of unemployment has been challenged over the past few weeks as the shift identified in 2009 for the US economy appears to vanish.

By: Date: September 20, 2014 Topic: Global Economics & Governance

What’s at stake: The traditional interpretation of shifts in the Beveridge curve – the relationship between the vacancy rate (jobs openings/labor force) and the unemployment rate – as increases in the structural level of unemployment has been challenged over the past few weeks as the shift identified in 2009 for the US economy appears to vanish. Recent research also points that outward shifts in the Beveridge curve have been common occurrences during previous recoveries and that, by itself, an outward shift does not say much about future levels of structural unemployment.

The traditional interpretation of a shift in the Beveridge curve

The euro area Beveridge curve suggests the emergence of a structural mismatch across euro area labor markets

In his Jackson Hole speech on euro area unemployment, Mario Draghi writes that the euro area Beveridge curve suggests the emergence of a structural mismatch across euro area labor markets. In the first phase of the crisis strong declines in labor demand resulted in a steep rise in euro area unemployment, with a movement down along the Beveridge curve. The second recessionary episode, however, led to a further strong increase in the unemployment rate even though aggregate vacancy rates showed marked signs of improvement. This may imply a more permanent outward shift. […] All in all, estimates provided by international organizations – in particular, the European Commission, the OECD and the IMF – suggest that the crisis has resulted in an increase in structural unemployment across the euro area, rising from an average (across the three institutions) of 8.8% in 2008 to 10.3% by 2013.

Peter A. Diamond and Ayşegül Şahin write it is tempting to interpret a deterioration in the matching/hiring process in the economy as a structural change in the way that the labor market works and thus to assume that it is orthogonal to changes in aggregate demand. Indeed, that approach to interpreting a shift in the Beveridge curve has been standard in the academic literature, going back to Dow and Dicks-Mireaux (1958). If valid, this interpretation would support an obvious policy implication: however useful aggregate stabilization policies while unemployment is very high, they are likely to fail in lowering the unemployment rate all the way to the levels that prevailed before the recession, since the labor market is presumed to be structurally less efficient than before in creating successful matches.

In their lecture on hysteresis for an advanced undergraduate class, Christina Romer and David Romer write that a shift in the Beveridge curve may also show that the normal vacancy rate has risen or that both the normal vacancy rate and normal unemployment rate has risen. Since between the 1960s and 1980s, the unemployment rate associated with a given level of vacancies rose about 4 percentage points and that most experts think that the natural rate of unemployment rose about 2 percentage points over the same period, a rule of thumb might be that the raise in the natural rate is ½ the shift out in the Beveridge curve.

Historic shifts and unemployment recoveries

Peter A. Diamond and Ayşegül Şahin write that looking at 60 years of data, instead of just the last 14 years, reveals that outward shifts in the Beveridge curve after the point of maximum unemployment rate are common occurrences in the U.S. labor market. Interestingly, the only business cycle during which the unemployment-vacancy pairs did not shift, but stayed on the same downward sloping Beveridge curve, is the 2000-2006 cycle. In all the others there is a notable outward shift in the curve after the maximum unemployment rate is reached.

The Beveridge Curve has moved outward seven times before. Four times the unemployment rate didn’t make it back to its previous lows

Real Time Economics writes that Beveridge Curve has moved outward seven times before. Four times the unemployment rate didn’t make it back to its previous lows. But three times, it did. The Beveridge Curve shifted out but then the unemployment rate still made a complete recovery. Peter A. Diamond and Ayşegül Şahin write that if, by itself, the outward shift were a good predictor of a sustained rise in structural unemployment, it should be the case that, after a shift in the curve, the unemployment rate does not reach its pre-recession minimum during the recovery period.

Christina Romer and David Romer write that this typical pattern early in recoveries may reflect the changing composition of firms toward those that tend to post more vacancies (bigger firms, non-construction firms).

Was there a shift to begin with?

Murat Tasci and Jessica Ice write that whether or not a shift implies an actual structural change – specifically, a decline in the matching efficiency of the labor market – is still debatable. However, one thing is clear: there is no shift to begin with. 

Murat Tasci and Jessica Ice write that early on in the current recovery, economists and policymakers were worried about a potential shift in the Beveridge curve. The data at the time suggested to some that a shift was occurring that would indicate that efficiency was falling: Job vacancies were rising, but the unemployment rate was not declining, fueling a debate about a structural problem in the labor markets. Exactly four years ago, we touched upon this issue here, and argued that it was too early to call what had happened a shift. Most of the arguments for a shift were based on data from the Job Openings and Labor Turnover Survey (JOLTS), which had only started measuring economy-wide job openings in December 2000. It is safe to say that what seemed like a shift in the Beveridge curve ended up being another manifestation of the “normal” dynamics of unemployment and vacancies in the United States. 


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