Has the Beveridge Curve Shifted?
The Beveridge curve is an empirical relationship between job openings (vacancies) and unemployment. It serves as a simple representation of how efficient labor markets are in terms of matching unemployed workers to available job openings in the aggregate economy.
The fact that at any given point in time, there are unemployed workers looking for a job and firms looking for employees to fill their vacancies would be an anomaly in perfectly functioning markets. Economists attribute this apparent anomaly to frictions in the labor markets that prevent it from allocating unemployed workers to firms that are looking for employees. These frictions might take the form of skill-job mismatches, geographical mismatches, the cost of recruitment and job search, etc. Such frictions are typical, and we observe some level of vacancies and unemployment even in well-functioning labor markets. The Beveridge curve represents this equilibrium in the labor market over time in terms of these two variables.
Economists study movements in this curve to identify changes in the efficiency of the labor market. It is common to observe movements along this curve over the course of the business cycle. For instance, as the economy moves into a recession, unemployment goes up and firms post fewer vacancies, causing the equilibrium in the labor market to move downward along the curve (the red arrows in the figure above). Conversely, as the economy expands, firms look for new hires to increase their production and meet demand, which depletes the stock of the unemployed.
While the point of equilibrium can shift up and down the Beveridge curve, the entire curve can shift as well. Shifts in the Beveridge curve indicate changes in the matching efficiency of the labor market. A structural change might move the economy to equilibrium on a different Beveridge curve. An example of this might be fundamental technological change which creates a gap between the skills needed for open vacancies and the skill set of the unemployed. In this case, for the same level of job openings, equilibrium unemployment will be higher, illustrated by the Beveridge curve shifting up and to the right.
An economywide measure of vacancies is provided by the Job Openings and Labor Turnover Survey (JOLTS) published by the Bureau of Labor Statistics (BLS). According to the survey, the level of job openings has been increasing over the second quarter of 2010, spiking above 3 million for the first time since December 2008. The BLS also reports a job openings rate, which is the level of job openings as a percent of total employment plus the job openings level. This rate has been rising coincidentally with the job openings level, recently topping 2.5 percent. While there have been improvements as of late, both the vacancy level and rate are below their historical averages after dropping to all-time lows during the most recent recession. It is important to note that while vacancies have been rising, the unemployment rate has lingered well above 9 percent, spurring debate as to whether there has been a shift in the Beveridge curve.
The visible change in the Beveridge curve in the past two quarters suggests that the labor market’s longer-term adjustment process may have been adversely impacted by the recession. However, a closer look at the data reveals that part of the rise in job openings in April and May was due to Census recruitment by the federal government. Looking at the figure below, the level of government job openings spiked in April and May 2010 and pushed the rate of government job openings from 1.8 percent in March to 2.7 percent in April and 2.6 percent in May.
This Census effect is actually larger when one takes into account the recent reduction in state and local government job openings, as states and cities tighten their budgets. Removing the federal government’s reported surge in job openings reduces the job openings rate by 0.2 percentage point for both of these months, reducing the quarterly rate to 2.23 percent from 2.45 percent. A similar calculation for the first quarter of 2010, which was not affected by Census hiring, only reduces the overall rate to 2.03 percent from 2.1 percent.
The drawback to the data we have looked at so far is that they do not cover most of the postwar period. JOLTS data cover only the two most recent recessions. To get a longer-term picture and put the current movements in the context of a broader pattern, we need a measure of vacancies that starts before December 2000, when the JOLTS started. One candidate is the Conference Board’s Help-Wanted Print Advertising Index (HWPAI), which starts in 1951. However, with the advances in computer technologies and the internet, print advertising has declined, especially since 1995, and this index has become a much less reliable measure of aggregate vacancies.
Recently, the Conference Board started to publish the Help-Wanted Online Advertising Index (HWOAI), which begins in May 2005. If we combine the data from the HWPAI, HWOAI, and JOLTS, we can get a longer-term look at the data. One can construct a composite index for vacancies from these sources by a simple method to have a consistent data that spans most of the postwar business cycles in the United States.
One important observation is that a longer-term look at the Beveridge curve shows that the dynamics we have seen recently are not an exception, but are common during the recovery phase of business cycles. As the economy starts improving, it takes time to deplete unemployment, even though job openings are relatively quick to adjust.
Hence, cyclical changes may not necessarily present themselves as they are displayed in the first figure above, as a neat movement along the curve. During and after recessions in the postwar period, the Beveridge curve has generally followed a pattern of shifting to the right during a recovery. One potential reason for this could be that even though some unemployed workers start filling the available job openings, workers who had left the labor force might get encouraged by the recovery and start looking for a job, thereby keeping the unemployment high. While the Census may have skewed the data for this recovery, the path of the curve going forward looks poised to follow in the footsteps of previous recessionary periods. Firm conclusions will only be able to be drawn as more data are generated.
To compute the composite index, we followed the method described in “Building a Composite Help-Wanted Index,” by Regis Barnichon.