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!).
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).
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.
Over at PostEverything–and if you too dip into this genre, feel free to add your own favs to the list.
Fed vice-chair Stan Fischer gave another interesting (and long!—dude, you don’t have to cover everything in each outing!) speech today wherein he continues to articulate the Fed’s state-of-the-art thinking on all the big issues (here’s an earlier post re Fischer on financial oversight).
Just did this CNBC hit on it so let me summarize the point I found most interesting (btw, all else equal, shouldn’t you listen to the guy wearing the tie?!).
Fischer wades into this portentous question of whether the potential growth rates of advanced economies has slowed as much as a by-now-wide-spate of research shows. I review Larry Ball’s paper on the topic here, but the idea is that the Great Recession did permanent damage to the three inputs that determine potential GDP growth: labor supply, capital investment, and productivity growth.
Stan poses the right question:
How much of this weakness on the supply side will turn out to be structural–perhaps contributing to a secular slowdown–and how much is temporary but longer-than-usual-lasting remains a crucial and open question.
And this part of his answer is particularly important (my italics):
…there are good reasons to believe that some of the surprising weakness in labor force participation reflects still poor cyclical conditions. Many of those who dropped out of the labor force may be discouraged workers. Further strengthening of the economy will likely pull some of these workers back into the labor market, although skills and networks may have depreciated some over the past years.
Later, he adds: “…it may also be possible to reverse or prevent declines from becoming permanent through expansive macroeconomic policies.”
Chair Yellen has made similar points, which I have discussed under the rubric of “reverse hysteresis.”
When a cyclical problem morphs into a structural one, economists invoke the concept of hysteresis. When this phenomenon takes hold, the rate at which key economic inputs like labor supply and capital investment enter the economy undergoes a downshift that lasts through the downturn and well into the expansion, reducing the economy’s speed limit. But what I’m suggesting here is that by running the economy well below conventional estimates of the lowest unemployment rate consistent with stable inflation, and doing so for a while, we can pull workers back in, raise their career trajectories, improve their pay and their living standards, and turn that downshift to an upshift that raises the level and growth rate of G.D.P.
Curiously, in the context of this discussion, Fischer cites the important Fed study that really triggered this debate on the extent to which cyclical problems have become structural ones, despite the fact that the study, running off of the (tweaked-up) Fed macro model, explicitly denies the possibility of reverse hysteresis:
Policy makers cannot undo labor market damage once it has occurred, but must instead wait for it to fade away on its own accord; in other words, there is no special advantage, given this specification, to running a high-pressure economy.
No one knows, but I don’t think that’s right, and I’d say the Fed’s chair and vice-chair at least provisionally agree. The implication for current policy is clear: we need to run a high-pressure economy for a while not just to close existing output gaps but to increase potential growth by pulling more people and capital investment back into the economy. That, by the way, is what I mean by “supply-side economics” (not that Art Laffer silliness!).
Final point: Early on, Fischer asserts that he “…will leave it to others to address the important challenges facing fiscal policymakers as they determine the appropriate roles and paths for fiscal policy at both the macro- and micro-levels.”
To his credit, he doesn’t quite stick to that restriction but I don’t see anything wrong or at all unprecedented for Fed officials holding forth on the macro economy to comment as much as is needed on this critical part their model (Bernanke often complained directly to Congress on this point). I’m not saying he should name names, of course, but no one’s purpose is well served if one of the most profound and impactful economic mistakes in recent years and across many countries—fiscal austerity in the face of weak demand—is cordoned off and “left to others.”