Sunday, November 24, 2013

Watching the trajectory of the Beveridge Curve

A number of economists continue to talk about the "structural shift" in US labor markets that took place during the Great Recession. For example, back in September, Georgetown University published a report called Failure to Launch: Structural Shift and the New Lost Generation (see document). The paper focuses on changes with respect to youth employment that appear to be structural (long-term) rather than cyclical.

But how does one measure the degree to which the labor markets deviate from historical norms? The simplest indicator of this shift remains the Beveridge Curve (see discussion). It's a scatter plot of job openings versus the unemployment rate (here we use the U5 rate). More job openings should result in lower unemployment. But the path and the slope of the curve tells us something about the current situation relative to recent history. The data captures structural effects such as:

1. Weak labor mobility - with mortgages underwater, many workers for example can't simply move to North Dakota where the job market is vibrant.
2. Skills mismatch - workers with a college degree often go on unemployment rather than taking a low-paying job in the fast food industry for exmple. At the same time workers with specialized skills may be difficult to find (see example).
3. Part-time vs. full-time mismatch - many workers who receive unemployment benefits do not accept part-time work.
4. Impact of long-term unemployment - workers who have been out of work for a long time have trouble reentering the workforce even if there are job openings.
5. Some argue that increased poverty creates barriers to entry into the labor markets for certain groups.
6. One reader suggested that unlike in the past, job openings are not always for immediate hires. Openings could persist for some time without resulting in a job creation.

What's powerful about this simple measure is that it can be updated on a monthly basis. And in spite of arguments to the contrary (here) recent results seem to suggest an ongoing divergence from historical behavior in the post-recession economy.

The question now (6 years after the start of the Great Recession) is whether we will start seeing a shift toward normalization. It's a critical issue for monetary and fiscal policy decision makers because the curve tells us something about the "natural rate of unemployment". That's effectively the long-term unemployment rate under the best case scenario. At least in theory no matter how much the economy improves, the unemployment rate will not decline below the "natural rate" without igniting significant inflation. In the chart above for example if the structural shift persists, the best outcome for U5 unemployment is now about 2% higher than in the past. If however we see some normalization, the natural rate could potentially go lower. If the overall unemployment rate continues to fall in the next few months, we should be able to tell more about the trajectory of the Beveridge Curve and the expected level of the natural rate of unemployment.
From our sponsor:
Related Posts Plugin for WordPress, Blogger...
Bookmark this post:
Share on StockTwits