Has the Beveridge Curve Really Shifted?

August 13th, 2014 at 10:58 am

The Beveridge Curve (BC) is a favorite tool of labor economists showing the inverse relationship between job openings and unemployment. It’s thus a kind of index of strength of labor demand: when the job market is tight, there’s low unemployment and more unfilled openings/job vacancies, and vice versa.

As shown below, using the BLS monthly version of the BC, openings are on the y-axis and unemployment is on the x-axis, so the curve slopes down from the upper left (tight job market…yay!) to the bottom right (weak market…boo!).

bev1

Source: BLS

So far, so good, but the BLS’s BC shows a marked shift in the curve toward the northeast. Whussup with that?!

Such shifts in the BC are thought to represent changes in the efficiency of the matching process in the job market. That is, if, as the recovery progresses, employers have openings but they can’t match the applicants they’re seeing to the jobs that need filling, the BC moves as it does in the figure. It could be a skills mismatch, where applicants’ skill supplies are notably weaker than employers’ skill demands. Or it could be geographical, such that the employers who are hiring are in different physical places from job seekers.

If you follow this part of the debate, you know that there are many who’ve made precisely this skills mismatch argument, often based on these data. I’ve been on the other side of that debate, arguing that the problem has been weak demand. What’s missing, I’ve argued, are jobs, not skills.

[insert defensive caveat paragraph here] To be clear, I’m not saying such skill mismatches don’t exist. Of course they do. Nor am I saying every applicant has the skills they need—surely many would be better off with more training/education.

I’m saying that right now, these skills issue are secondary to the demand shortfall, a view that carries the policy implication that we should focus first and foremost on reducing slack (though of course slack reduction and better training are by no means mutually exclusive).

How then, do I explain this shift in the BC? A few years ago, those on my side of this aisle thought that perhaps the shift was temporary but we’re now five years into the recovery. So what say we now?

As economist Gary Burtless reminded me, a recent paper by Krueger et al shows this to be at least partly a function of long-term unemployment (jobless for at least 26 weeks), a particularly serious problem in this recession/recovery. The following graphs, updated from Krueger et al, confirm this point by plotting the same BLS graph on the top (without the formatting bells and whistles) and the same figure but with short-term unemployment (jobless less than 26 weeks) replacing total unemployment on the bottom. The shift pretty much disappears (a statistical test confirms the significance of the shift using overall unemployment and its insignificance using short-term rates).

bev2

Source: my analysis of BLS data.

So what the heck does that mean?

One interpretation is that the long-term unemployed are not really in the labor market; they’re not really looking for work and not contributing much to slack. In that case, it’s the short-term unemployment rate that really matters. Re the BC, this implies no change in the efficiency of job matching, just a measurement problem with the total jobless rate.

But there’s a problem, one that the aforementioned Burtless underscores in his analysis of the alleged skills mismatch: the absence of any wage pressures. If much of the slack has been squeezed out of the job market, as the short-term unemployment rate suggests—it’s back down to its historical average of around 4%–and even more so if employers can’t find the workers they need, then we ought to see them bidding wages up to get and keep the workers they need.

The fact that we don’t see such wage pressures poses a stiff challenge to both of these arguments: the shift in the BC and the long-term-unemployed-don’t-add-to-slack. Simply put, it’s awfully hard to square a bunch of job vacancies and flat wage growth. If employers really wanted to fill those vacancies, we should see evidence on the wage side. And please don’t invoke lags, as in “wage pressure is right around the corner!” That may be true—I think and hope it is.  But as I’ve stressed, the shift in the BC is years old by now.

Economist Jesse Rothstein has also cast doubt on the BC’s outward shift, arguing that as measured by the data source in the figures shown throughout–the BLS JOLTS–we shouldn’t assume that more job openings mean more labor demand, especially, once again, absent faster wage growth.

The problem, Jesse argues, is that job vacancies as measured by the JOLTS and vacancies that underlie the theory of the BC are quite different in ways that make it hard to interpret that shift. Interestingly, the problem is the weak labor market itself.

The matching theory behind the BC is simple: an employer has an opening, someone shows up who meets the basic qualifications and the firm hires her right away at the market wage. At full employment, something closer to that dynamic may hold. But in slack labor markets, not so much. Back to Jesse:

If employers are indeed taking advantage of the weak labor market to reduce offered wages or to hire more qualified workers, one would expect this to reduce the rate at which posted vacancies are filled and therefore to raise the job openings rate. This limits our ability to diagnose labor market tightness based solely on the aggregate Beveridge Curve.

[See Jesse’s updated paper on this and related questions, including a deep dive on the absence of wage pressures which is key to accurate diagnosis and prescription in this space right now.]

Here’s what I think is going on. The job market has in fact been tightening, but in a somewhat unusual way: through diminished layoffs more so than through robust hiring (see figure here and this important related work as well).  The former—fewer layoffs—is keeping the short-term unemployment rate nice and low. The latter—tepid hires—is keeping the long-term jobless rate high. That’s creating the illusion of decreased matching efficiency but it’s really just the result of the persistent slack and the unusually high share of long-term unemployment with which we’ve been stuck for years now.

So yes, the BC has shifted but that shift is likely saying more about slack than matching problems.

This dynamic is improving (thus my hope re future wage growth, assuming the Fed doesn’t over-react and kill it before it grows). The labor force has stabilized in recent months, the pace of job growth, including new hires, has picked up, and the long-term unemployment rate has been coming down as well.

But we’re still far from full-employment and it will take more than diminished layoffs to get there. We need more robust job growth to both close the gap between vacancies and hires and to generate some long awaited wage growth. Like I said, I’m all in for more worker training, but at a time like this there’s nothing like a really tight job market to boost matching efficiency.

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18 comments in reply to "Has the Beveridge Curve Really Shifted?"

  1. Some guy says:

    “Like I said, I’m all in for more worker training, but at a time like this there’s nothing like a really tight job market to boost matching efficiency.”

    I agree. If demand picks up, maybe employers will hire from pools of real human beings and stop using magical thinking / dreaming up purple squirrel employees who have 2 degrees in everything, 25 disparate skill sets, will do two 2 jobs at once, work 80 hours a week, and work for peanuts (acorns?).


  2. jhaskell says:

    “Like I said, I’m all in for more worker training, but at a time like this there’s nothing like a really tight job market to boost matching efficiency.”


  3. jhaskell says:

    “Like I said, I’m all in for more worker training, but at a time like this there’s nothing like a really tight job market to boost matching efficiency.”

    The issue vis-a-vis the skills gap is two-fold. First, is there a skills gap? Second, if so, who pays for that training? What biz has been able to do is paint the skills gap as a public policy issue, and thus, something for policymakers to deal with. Training programs have been cut, and companies are becoming poachers rather than trainers. During a down economy where jobs are scant and the masses look to policymakers to rectify the situation, biz can turn what is in part their doing into another failing of policy.


  4. Flex says:

    Just a note from the trenches…

    We’ve had an opening for a skilled technician for months. There are three things which are making it difficult to find anyone.

    1. The expectations from our management team is too high. They are looking for someone with 5+ experience in a field (automotive EMC testing) which is only about 20 years old. There aren’t a lot of people out there. I know we could train them, it would take about 3-5 months, but they want someone who can be up to speed in 6 weeks. And they’ve been looking for that person for 8 months. (I know – it doesn’t really add up.)
    2. Our corporation has decided that anyone coming in needs to be on a contract for at least 3 months. We’ll only direct hire people after they’ve been working for more than 3 months, preferably 6, maybe 9.
    3. We really need someone for a 2nd shift work. Our current workforce has enough seniority (80% of them will retire within 5 years) that they have flat out said they would quit rather than work rotating shifts. A lot of candidates have balked at this.

    So we have three aspects of our job hunt which are delaying our hiring someone and adding to the employment statistics:

    1. Unreasonable expectations from the direct supervisors who are waiting for one of the few perfect candidates to apply.
    2. A corporate directive which artificially limits the candidate pool to those who are willing to be contract for an unspecified period of time.
    3. Candidates who are unwilling to be permanently on a second shift.

    In the meantime our projects are falling behind and we’re paying a lot of overtime to those who are working. (The exempt employees, like myself, are simply putting in extra hours.)

    So while my experience is entirely anecdotal, tepid hiring gets my vote.


    • Jared Bernstein says:

      Excellent and interesting anecdote–we love to hear from the trenches! thnx


    • Some guy says:

      Thanks for posting this.

      This is exactly what I see from the jobseeker’s perspective. Unreasonable and inflexible demands.

      On the contract/consulting end (how I survive while employers just won’t hire non-superheroes/ imaginary people), I have seen as much indecision on the short term work– not being clear on daily rate range, level of effort (LOE)/ hours and scope of work, and more than anything else- delaying– stringing you along, asking for phone consultations on the scope of work, delaying pulling the trigger, etc. For example, I just got a consulting offer (in writing) from a place I talked to six months ago, and they still haven’t told me the scope of work, pay, etc!

      What is ridiculous is that they will go through the effort of vetting you as good enough to do the contract work, waste as much of your (unpaid) time discussing the project, and then still balk at spending money on the proposed project itself.

      Honestly, from my perspective, I just have to walk away from these indecisive employers. At some point, in the words of my mother,” J’en ai marre!!!!” (I’ve had enough, I’m fed up!!!!)


    • Tiree says:

      “2. A corporate directive which artificially limits the candidate pool to those who are willing to be contract for an unspecified period of time.”

      This should be illegal practice. Contract work should not be used as a trial run for employment. It is common practice, but only because it is easy to get away with it. Nobody questions the practice. Certainly the candidate wouldn’t question it, would they? If they were eventually hired, would they report it to the IRS that they were illegally classified as a contractor prior to getting hired? Of course not. If they are canned, do they have a valid complaint? Yes, but is very hard to prove intent.

      If a person is looking for full time employment, they should apply for jobs that are full time openings for employees. To do otherwise is to place oneself at the mercy of office politics. Office politics with low-level managers usually determines who stays and who goes, and the only objection upper management usually has is that it costs money to have turnover in employees. If upper management’s wishes for low turnover can be fulfilled with contractors, and lower-level manager’s wishes can be satisfied as well because they can fire at the drop of a hat without repercussions, the companies using this practice could stagnate in growth for internal micro reasons (office politics, managers protecting themselves) rather than macro reasons.

      In these cases, it is likely that the CEO and directors would blame a skills mismatch for the problem. They have no way of really understanding that the problem is an equilibrium between their upper managers and lower managers. In normal macro times, this equilibrium doesn’t exist. That is, in a tight labor market, they will hire anyway to avoid losing candidates.

      I think a lot of people believe there is an inherent desire from inside for companies to grow. Not always.


    • PeonInChief says:

      I’ve noticed the same thing just from looking at the local job listings. Employers seem to expect a lot of degrees and training for jobs that pay $10 an hour.


  5. Aaron Sheldon says:

    Sounds like the skills mismatch is in the wrong direction: retail is hiring but construction and skilled trades are not. After all much of the missing employment from before the recession was in the skilled trades of construction, and construction has not recovered to the pre-recession levels.

    Its hard to imagine a skilled plumber or electrician, each of which requires 4 years of training and apprenticeship, being enthused by the possibility of being employed to ask “would you like fires with that?”

    The deeper story here is behavioural, with the shift in the scale of consumer purchases. A larger portion of the economic activity is going into cheap disposable consumer purchases, while a smaller portion of the economic activity is going into big ticket items like real estate, luxury cars, and investment purchases.


  6. smith says:

    More here on that, and specifically vacancy yields, the number of hires as a percentage of openings that are ever filled. It’s an important number not shown above or in the abstract of these two papers, but perhaps buried inside (think I saw when I originally read)

    http://www.frbsf.org/economic-research/files/wp12-09bk.pdf

    http://www.nber.org/papers/w16265.pdf


  7. Bud Meyers says:

    Just do a Google search for “phony job openings”. There are those that post job openings that don’t really exist, and for various reasons. Some are corporate strategies, others are to harvest information, and others are outright scams. Are there REALLY that many REAL job openings?


    • smith says:

      Yes, even before the increase in openings that never get filled, it was common practice to always look for new candidates by keeping a surplus of openings over planned hiring. (please anyone with the aggregate average number, let us know). So the increased vacancy rate comes naturally from a slowdown in hiring and as is indicated here, wages are the truer measure. But please frame the response not as “Real wages are not increasing” because we want real increases, but closer to “Real wage increases are not much beyond the 1.5% productivity increase and some other portion which helps to make up for previous wage declines and rising inequality. We want lower corporate profits from increase wage costs even though stock prices will decline hitting wealth. When business learns they can’t profit from exploiting workers, perhaps they’ll realize expansion and innovation is better strategy than consolidation and higher margins.


  8. PD 33043 says:

    If you look at total jobs (employees+ job openings) (http://research.stlouisfed.org/fred2/graph/?g=HIo ) , you see that the total number of jobs has surpassed the 2008 nadir with the number of employees increasing at a very linear looking rate. Recently the number of job openings has started to accelerate which should indicate a corresponding increase in wages…

    In the graph http://research.stlouisfed.org/fred2/graph/?g=HIs , there is a definite relationship between monthly Beveridge ratio (Job openings / UNRATE) and monthly hourly wage levels. Until recently they tracked very well, but with the acceleration in job openings wages are lagging.

    In a related graph http://research.stlouisfed.org/fred2/graph/?g=HIu you see that corporate profits gave increased dramatically more than inflation and wages so that the fee percentage of the final price is a lot more than what it used to be. I can speculate there is a reluctance to lower profit rates to gain employees with higher wages. It will be interesting to see if a tight job market will demand wage increases and whether employers will be willing to sacrifice profit rates for market share at the current low inflation levels, or there will be some increased inflation to accommodate increased wages at the current profit rates.


  9. samuel says:

    One interesting effect that I have witnessed in the workplace is that with the aid of computers I can now do the tasks of what once took several people in my field, communications. I can do graphic design, web programming, videos, email distribution, print materials, photography. Of course, some I excel at and others I am average. But, management expects me to do all. After a couple off years of not meeting impossible expectations, I am let go or leave burned out. Fifteen years ago, three people would be doing my work. Now it is just me and the other two are long time unemployed baby boomers.


    • smith says:

      You are mistaking work for production. Work is the hours clocked at some activity required to get pay. Production is stuff that gets made, physical stuff like houses, cars, and (what else is still made in America?) food, services provided.
      However, surprise, surprise, neither really matters when it comes to wages and inflation. Inflation measures prices (of things bought), prices come from demand, and demand is manufactured. It’s the demand for McMansions, SUVs, Starbucks, iphones, and Nikes.
      The point is that if everything in the world was made by one person running machinery, robots, and computers, it wouldn’t mean the economy couldn’t function almost exactly the way it does today. An equitable distribution of wealth would ensure everyone received income from the running of this one person business. We’d still be free to spend our income as we saw fit, and likewise allocate our free time. It’s done all the time for large portions of the population (retirees, children and a portion of students supported by parents, rich people) Additionally, people in the arts, entertainment and sports fields who don’t reach the top tier would no longer be forced to starve.


  10. Kaleberg says:

    Is it really that much harder to get into a competitive college than it was forty years ago? When I applied, during the baby boom, a college like Harvard would have a one in ten acceptance rate. Now it’s closer to one in sixteen. Harvard is still highly desired and has roughly the same number of slots it had ages ago. The college age cohort is not 60% larger than it was. Also, it isn’t just Harvard; the acceptance rate has been falling at most highly ranked colleges and even at colleges further down in the rankings. So, what changed?

    One difference is that it is a lot easier to apply to colleges these days. To start with, most of it can be done online. There is even a common application that a lot of schools accept, and those that don’t still make application easier. If nothing else, there is cut and paste. There was no way you were going to turn in a carbon copy or photocopied essay. You had to type the whole thing afresh. The sheer mechanics of applying were more time consuming. Further, applications are cheaper these days. Harvard cost $25 way back when. It now costs $75. According to the BLS calculator, it should cost almost $150. It is just cheaper and easier to apply to a college, so people apply to more of them.

    Has something like this happened with searching for employees? In the old days HR would have to post ads for the jobs in various classified sections and more generic ads for the company in various specialized magazines. This cost money. Then they’d have to screen the applications by hand. Applications came in on paper and had to be sorted. They had to be read, if only in part. Just finding out if someone had worked with Cobol or knew how to repair moisture evaporators required a nearly complete scan. Nowadays, a job listing takes a few clicks of the mouse and some cutting and pasting. The applications are submitted and screened electronically. The cost of a job listing is negligible. One would expect there to be lots more job listings. So what if they are just speculative. They are nearly free.

    On the other side of the table, it is much cheaper and easier to apply for jobs, so I imagine that the number of jobs applied for during a given term of unemployment has probably risen dramatically.

    The Beveridge curve shifted due to structural changes that have nothing to do with the availability of work or the unemployment rate.


  11. dwb says:

    The BC probably has shifted, and here’s why: Housing.

    12-15% of residential properties are still in negative equity: http://www.calculatedriskblog.com/2014/06/corelogic-year-over-year-negative.html

    Why does that matter? Say I want to take a job. Much of the time the job is elsewhere. I have to eat the cost of moving (8% in taxes and fees selling a house, plus moving costs). I might not have the savings to put down on the new house (lending standards are still pretty tight), so if the mortgage is 2x my salary, I need to come up with (roughly) 16% of my salary in fees/taxes, plus another huge chunk for a down payment. Chances are, the job is just not that good so why switch jobs. And, it might take 15 months to sell my house during which I still have to pay the mortgage.

    It’s not skills mismatch, it’s a geographic mismatch. There are other issues, but it boils down to the friction cost of moving to change jobs.

    As housing prices rebound and wages rise in areas where jobs are in demand, the “friction” cost of geographic mobility will erode and the BC will shift back.


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