The Beveridge Curve needs to be understood by everyone

It’s Not a Skill Mismatch: Disaggregate Evidence on the US Unemployment-Vacancy Relationship
[Via Economist's View]

From Vox EU, William Dickens and Rand Ghayad argue skills mismatch is not what’s driving high levels of unemployment:

It’s not a skill mismatch: Disaggregate evidence on the US unemployment-vacancy relationship,by William Dickens, Rand Ghayad, Vox EU: The Beveridge curve – the empirical relationship between unemployment and vacancies – is thought to be an indicator of the efficiency of the functioning of the labour market. Normally when vacancies rise, unemployment falls following a curved path that typically remains stable over long periods of time. When vacancies rise and unemployment does not fall (or falls too slowly) this may be an indication of problems of structural mismatch in the labour market leading to an increase in the lowest unemployment rate that can be maintained without increasing inflation (the Non-Accelerating Inflation Rate of Unemployment (NAIRU). Key contributions to this strand of work were progressively made by Dow and Dicks-Mireaux (1958), Lipsey (1960), Holt and David (1966), Hansen (1970), and Bowden (1980).

More jobs, more jobless

The unemployment-vacancy relationship has received much attention among economists and policymakers over the past few years. Since the end of the Great Recession, we started seeing the Beveridge curve shifting out toward the upper right, reflecting a decrease in labour market efficiency. The outward shift means that firms can’t fill their available job openings as readily as we would have expected in light of the high unemployment rate (Kocherlakota 2010).

Controversial interpretations of the data

The basic fact that recent ‘job vacancy, unemployment’ points lie outside the locus of points that seemed to define the Beveridge curve in the 2000s is not in dispute, but its interpretation has been controversial. Interpretations of the recent data range from a temporary cycling around a stable Beveridge curve due to the prolonged slow recovery from the Great Recession to a quasi-permanent shift of the Beveridge curve due to pervasive mismatch between the qualifications of job applicants demanded by employers and the qualifications offered by unemployed job searchers.

Figure 1 plots vacancy-unemployment points from 2001 on. The curved relationship between unemployment and vacancies depicted in Figure 1 is often called the Beveridge curve. Over the recession of the early 2000s, and the recovery from that recession, the vacancy-unemployment relationship remained remarkably constant, as it has for long periods of time in the past. However, in the recovery from the most recent recession we see that vacancies have grown considerably without producing the normal decline in unemployment. It looks as if the Beveridge curve may have shifted out. The figure displays an empirical relationship combining data on vacancies from the Job Openings and Labour Turnover Survey (JOLTS) with the aggregate unemployment rate obtained from the Bureau of Labor Statistics’ monthly household survey. The data span the period January 2001 through June 2012 and are seasonally adjusted. The solid line in Figure 1 reflects a stylised Beveridge curve that was estimated using data on unemployment and vacancy rates for the period prior to the start of the recession. The plot reveals that by September 2009, the vacancy-unemployment points started to deviate away from the fitted curve in an anti-clockwise direction indicating a higher unemployment rate at any given level of job openings.

Figure 1. Total vacancies and unemployment rates by unemployment duration

Source: CPS and JOLTS. Data are monthly rates, span the period 2001m1-2012m6, and are seasonally adjusted.

The seasonally adjusted BLS series of monthly unemployment rates for all employees, 16 years and over is disaggregated to examine the vacancy-unemployment relationship at different durations of unemployment. We do this to see if the unemployed with different durations benefit differently from the recent increase in the vacancy rate. We use data from the BLS’s Job Openings and Labour Turnover Survey (JOLTS) for the aggregate vacancy rate and plot that against the fraction of the labour force unemployed at different durations. Figure 2 presents that relationship for those unemployed for less than five weeks.

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The Beveridge Curve tells us that the job market we see today is simply not like any one seen before.

The Beveridge Curve looks at the ability of companies to find people for the jobs they want and the ability of unemployed people to find companies with the jobs they want.

What this all nicely shows is that there are more job openings available than one would expect for the unemployment levels. There are several more graphs but what they demonstrate is that the upward shift in the curve comes almost all from people who have been unemployed for 27 weeks or more.

And this suggests that there is a large group of people who simply cannot find work because many of the jobs available are simply not open to them. There is a reason why they have been unemployed for so long – they simply do not have what companies are looking for.

Here is the curve from Dec 2000 (using slightly different unemployment numbers), with contractions and expansions shown:

In other recoveries, the curve retraced itself. But in the last one, not only is there a huge shift down and right but the recovery is different.  It does not retrace the line but has much higher unemployment than we would expect. At the job vacancy numbers we now have, we would expect unemployment levels almost half of what they are.

It is as hard for a company to find people to fill jobs as it was in December 2001 when unemployment was half what it is today.

Why is this? We really do not know but the data are starting to suggest that there is something structural driving this. My guess is that technology is really disrupting the employment markets. During stable times, if there were a lot of vacancies it was because not many people were unemployed to fill them. All you could do was move people around. Filling one job resulted in a new job opening.

But, today, we have something different. Today, we have a lot of open jobs and lots of unemployed. The companies have lots of people to choose from, so why can’t they fill those positions?

This is something new. This imbalance may not just go away with a better economy.

How we fix this will be the policy debate of the next generation.

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