The Supply Chain explained

The supply chain has been stretched to the limit over the last two years and there have been a number of reasons for that. From a lack of containers to surges in global economy activity, as consumers shifting from buying services to buying goods, the freight time and cost have increased significantly.

From the IMF – good video explaining how the supply chain works and the problems faced after two years of lockdowns. Has the supply chain got too complicated?

Inflation and the Base Year Effect

A price index is a means of comparing a set of prices as they change over time. Index numbers allow for a comparison of prices with those in an arbitrary chosen reference (base year), a year that current values can be compared against. This base year is usually given a numerical value of 100 or 1000. The index number allows for percentage changes to be calculated between various time periods.

If we look at the last few years some of the current inflation increases has been exaggerated by what are known as base-year effects. What has happened is that annual inflation has been measured against a time during the COVID-19 pandemic when economies were locked down and prices slumped. Therefore the inflation figures around the world have been increasing quite rapidly but soon they will be measured against the current higher prices which should mean a lower inflation figure. Regions such as Europe that rely on imported energy may see a greater fall in inflation than others if the price of fuels like oil and gas were to quickly cool. But that doesn’t seem likely in the current climate especially with the war in the Ukraine and come October the northern hemisphere heads back into winter with greater energy use. The graph above is a little out-of-date in that inflation in the UK is now 9.1% and the Bank of England expect it to exceed 11% in October. The USA has an inflation rate of 8.6% and it is expected to reach 9%.

Central Bank rate increases in 2022
Below are the central bank rate hikes this year and the big question is have they got their timing and rate increases right.

  • With the threat of inflation should banks have increased their rates earlier?
  • If they tighten too quickly will that tip their economy into recession and a hard landing?
  • What is the right rate increase for the current inflation figure?
  • How long (pipeline effect) will it take for interest changes to impact the inflation figure?
  • These are the challenging questions that central bankers face in today’s environment.

For more on Inflation and Base Rates view the key notes (accompanied by fully coloured diagrams/models) on elearneconomics that will assist students to understand concepts and terms for external examinations, assignments or topic tests.

The economics of transfer deals – Sevilla FC

A colleague forwarded me link to the BBC sport website concerning the work of Ramón Rodríguez Verdejo aka Monchi. Monchi spent 11 years as player at Sevilla (goalkeeper) but is recognised more for his role at Sevilla’s sporting director. When appointed Sevilla were in the Spanish second division and Monchi studied clubs like FC Porto and Lyon who won titles but were able to sell top players and replace them with similar quality players for less money. His first signing was Dani Alves who six years later went to Barcelona for £30m a profit of £29.7m – other signings by Monchi are listed in the table below which equates to and overall £189.75m profit.

Sevilla was relegated from the top flight at the end of the 1996–97 season but returned to La Liga in 1999 with a policy of sell and grow. Since then they have won the following:

  • Copa del Rey in 2007 and 2010;
  • Uefa Cup in 2006 and 2007;
  • Europa League in 2014, 2015, 2016 and 2020.

Monchi pulled off another profitable transfer last season which saw Ivan Rakitic return to Sevilla for a second spell. Originally the Croatian was signed for £2.1m from Schalke in 2011 and then sold to Barcelona for £15.3m in 2014. In September this year Sevilla resigned him for £1.36m and still playing very good football at 32 years of age.

Do the new signings perform?

The website ‘Total Football Analysis’ looked at how well Monchi’s signings performed – this included five years at Sevilla (2012/13 to 2016/17) and two years at AS Roma (2017/18 to 2018/19) – he returned to Sevilla in 2000. His time at AS Roma was not as successful as at Sevilla.

How ‘Total Football Analysis’ judged the success of his signings was by using the metric: the percentage minutes played versus the price that was paid in the transfer market – see graph below. So logically the more expensive the signings the greater the minutes played. The players in red are AS Roma and those in blue are Sevilla FC.

Upper-left quadrant – poor signings as they are players with an above-average price (more than 7.63 million euros) who played below average minutes (39.24%).

Even if we are taking five seasons at Sevilla and only two at Roma, most of the players in the upper-left quadrant are Roma players. Only Ciro Immobile, Joaquín Correa and Paulo Henrique Ganso could be considered very bad signings for Sevilla in this period, while Roma in only two seasons had Patrik Schick, Javier Pastore, Grégoire Defrel, Rick Karsdorp, Cengiz Ünder, Davide Santon and Juan Jesus in the same list. 

Lower right quadrant – excellent signings. Those are players with a below-average price who played a higher than average percentage of minutes. This time, plenty of Sevilla players make the list, but only three Roma players: Aleksandar Kolarov, Federico Fazio and Nicolò Zaniolo.
Lower left quadrant – cheap but didn’t play much, which could mean they were supposed to play that role or were bad signings
Upper right quadrant – expensive signings who played a lot of minutes as there were high expectations.

The correlation between price and percentage of played minutes is represented with the green line. Curiously, the correlation is very low for Monchi’s signings, showing the price is a very bad predictor of players performances in his case. Part of this is because of his high spending at Roma on players who couldn’t make an impact. This reinforces what we suggested before: Monchi proved to be much better at signing lesser-known players for cheap fees than at making high-profile signings. 

Why do developing countries like a strong currency?

In the majority of economics textbooks a depreciation of the exchange is beneficial to an economy especially those like developing countries which depend a lot on export revenue.

A fall in the value of the exchange rate will make exports cheaper and so acts as an implicit subsidy to firms that sell abroad. Exposure to world markets also helps companies in the developing world learn and improve. Finished imported products that are still purchased will be more expensive and some of these will count in the country’s consumer price index. Costs of production will be pushed up because the cost of imported raw materials will rise. Domestic firms may also feel less competitive pressure to keep costs and prices low.

A rise in the value of exchange rate will make exports more expensive in terms of foreign currencies, and imports cheaper in terms of the domestic currency. Such a change is likely to result in a fall in demand for domestic products. A higher exchange rate may also reduce inflationary pressure by shifting the aggregate supply curve to the right because of lower costs of imported raw materials. The price of imported finished products would also fall and there would be increased competitive pressure on domestic firms to restrict price rises in order to try to maintain their sales at home and abroad.

It has been traditional for developing countries to try and engineer a weaker currency to make their exports more competitive especially as this revenue is one way in which their economies can start to grow. China and other South East Asian economies adopted this strategy as they went through industrialising their economy. Empirical studies suggest that an undervalued currency boosts growth more in developing rather than developed economies.

Why then is it that some African countries still want to maintain a strong currency? Primary sector exports and overseas aid raises the demand for local currencies making them appreciate. Governments are concerned about a weaker currency as

  • Some are dependent on capital imports to finance infrastructure projects
  • It forces them to spend more income to pay back foreign debts.
  • Pushes up the cost of imported goods, including food, medicine and fuel – mainly impacts the city population who are more likely to complain to politicians.
  • Some companies in developing countries import a lot of their machinery and raw materials – additional cost to their production.
  • A weaker currency does make exports cheaper but this can be nullified by more expensive imports.

However all of this has been overshadowed by COVID-19. The pandemic is increasingly a concern for developing countries which rely heavily on imports to meet their needs of medical supplies essential to combat the virus.

Crowd Psychology and the Stock Market

Anatole Kaletsky wrote an article in Gavekal Research – ‘Five Features Of Market Madness’ – (Ideas June 16 2020) in which he talked about ‘Nominative determinism’. Two examples:

  1. Chinese property company called Fangdd Network where its value jumped from US$800mn to US$10bn in four hours of trading. Fangdd Network made it sound like a cheap ETF (ETFs give you a way to buy and sell a basket of assets without having to buy all the components individually) for the FAANG technology giants.
  2. Nikola, an aspiring electric vehicle manufacturer with no revenues that launched three months ago on Nasdaq saw its value spike to almost US$30bn, up from US$300mn at its March IPO, mainly because, like Elon Musk’s electric car company, it was also named after 19th century Serbian-American inventor Nikola Tesla.

Anatole Kaletsky 5 features of market madness

  • While monetary easing usually starts a bubble, a reversal in monetary policy is unlikely to deflate the bubble once the speculative momentum builds.
  • Valuations do not matter while a bubble is inflating, but they become very important after it bursts.
  • Bubbles typically end with the some huge corporate collapses (Charles’s analogy of dynamite fishing), often tainted with fraud.
  • Bubble dynamics need not bear any relation to the strength, or weakness, of the economic cycle.
  • Speculation increases dramatically when prices break through major highs.

These examples show that it is not analysis of valuations, monetary policy or economic data that is driving prices up. Famous economist J.K. Galbraith once remarked that ‘economic forecasting was invented to make astrology look respectable’. He also said that we are mush reassured by the ‘conventional wisdom – i.e. strongly held beliefs that have, at best, a tenuous grounding in reality. John Maynard Keynes stated that ‘the market can stay irrational longer than you can stay solvent’. Mervyn King, former Governor of the Bank of England, argues that economic decisions always occur under conditions of, what he calls, ‘radical uncertainty’ – unaware of what might happen in the future. King says that people use ‘narratives’ to make sense of the world. He also suggest that economists in the 2008 GFC didn’t learn from history – the Great Depression before they were born.Each time they suggest that this time it is different – an expression by experts suggesting that the new situation (GFC) bears little resemblance to previous crises. Carmen Reinhart and Kenneth Rogoff in their book entitled ‘This Time is Different’ show that we haven’t learnt from what happened in the past – short memories make it all too easy for crises to recur.

Three Gorges Dam – Positive and Negative Externalities

Below is a very good documentary on the construction of the largest dam in the world – the Three Gorges Dam in China. However in its construction there are both costs and benefits including private and external. This is a topic in Unit 1 of the CIE A2 Economics syllabus and is found under – Externalities. Remember that we have both positive and negative externalities of production and consumption.

THE DIFFERENCE BETWEEN PRIVATE AND SOCIAL COSTS

 Externalities create a divergence between the private and social costs of production.

SOCIAL COST = PRIVATE COST + EXTERNAL COST (externality)
  • Private costs are the costs to a ‘firm of producing a good or service and to an individual of consuming a product.
  • External costs are the spill over effects on third parties.
  • Social costs are obtained by adding the private and external costs together. They reflect the total cost to society of an economic decision.

The same concept applies for Private and Social Benefits:

SOCIAL BENEFIT = PRIVATE BENEFIT + EXTERNAL BENEFIT (externality)

Benefits and Costs of building the Three Gorges Dam

Three Gorges dam - Externalities

The biggest benefit that is seen from the dam’s construction is that it produces renewable energy from hydro electricity. The Three Gorges Dam alone can provide China with 10% of its annual energy consumption. Increasing the proportion of hydroelectricity alternative to coal burning plants, will cut their emissions greatly which will help reduce the overall emissions all over the world – carbon emissions will be reduced 100 million tonnes compared to alternative coal generation.

The cost of hosting the Olympics

In class recently I have been covering the cost-benefit analysis of running an event like the Olympics. Rio de Janeiro in 2016 had major short falls in funding and for a city with a lot of poverty one questioned their motive for hosting.

The 1976 games in Montreal was the start of the financial issues for host cities – the blowout of $1.5 billion was paid by city’s rate payers and it wasn’t until December 2006 that the final payment was made. The projected cost of $124 million was billions below the actual cost. The 1980 Olympics was held in Moscow under the communist system but in 1984 the first real commercial games in Los Angeles took place. Because of the cost overruns in Montreal there was little interest in hosting the games in 1984 and therefore Los Angeles were able to negotiate favourable terms with the International Olympic Committee (IOC). With a lot of the infrastructure already in place and an increase TV rights – $34.9m Montreal 1976 to $286.9m Los Angeles 1984 – the latter was the only city to make a profit from hosting the Olympics – $215 million. See chart below for initial budgets and actual costs from 1996 – 2016..

However the financial success of Los Angeles games encouraged more cities to apply to become hosts with the desire to demonstrate their progress on the world stage. These countries invested massive sums to create the necessary infrastructure. With all Olympics there are specialised facilities that are only used for the games itself and have limited use post-Olympics. Almost all the facilities used in the 2004 Athens Olympics are derelict and ultimately the debt incurred with hosting the games contributed to the financial crisis in Greece. This was a similar story with the Rio Olympics where stadiums and the athlete’s village were left unused and the government was unable to sell them to the private sector.

Source: The Economics of Hosting the Olympic Games – Council on Foreign Relations.

Did the Olympics benefit London 2012?
The London Olympics which had a budget blow-out but did transform east London. From a rundown area into a community called East Village. The video from CNBC goes into more detail below:

IB/A2 Economics – Macroeconomic policies essay

With the mid-year exams next week here are a couple of mindmaps I produced using OmniGraffle (Apple software). I found it a useful starting point for students to discuss the effectiveness of each policy and the conflicts within macro objectives. This is a very common essay question in CIE Paper 4. My question would be:

What policies has the government in your country implemented since Covid-19 and how successful have they been in meeting macro economic objectives? (25)

Indifference Curves and Giffen Goods

Popular question either in the multiple-choice or the essay paper at A2 level. A giffen good occurs when a rise in price causes higher demand because the income effect outweighs the substitution effect.

Suppose you have a very low income and eat two basic food stuffs rice and meat. Meat is a luxury and is much more expensive than rice. If rice increased in price, your disposable income is effectively reduced significantly therefore, you buy less meat, to compensate for less meat you buy more rice to gain enough calories. Source: www.economicshelp.org

Griffen good and indifference curves

indiff-giffen

  • Good B falls in price – hence budget line moves from: 50 A – 30 B to: 50 A – 60 B.
  • The move from point J to point K is the substitution effect which = +16
  • The move from point K to point L is the income effect which = -20
  • These make up an overall move from point J to point L is the price effect (substitution effect + income effect) = -4

As income effect is negative, substitution effect positive and overall price effect negative Good B is a giffen good.

Summary of income and substitution effects of price changes

sub-income-effect

Sign up to elearneconomics for multiple choice test questions (many with coloured diagrams and models) and the reasoned answers on Indifference Curves. Immediate feedback and tracked results allow students to identify areas of strength and weakness vital for student-centred learning and understanding.

Interest rates and controlling inflation

Excellent video from The Economist. It goes through the impact of raising interest rates in an economy – mortgages, spending patterns, inflationary expectations. Also looks at when interest rates in the US went to 19.5% during the 1980’s. There is a fine line between increasing interest rates too quickly and tipping the economy into a recession or being too slow with the tightening process and letting inflation spiral upwards. The video discusses all these points – great revision for the Inflation topic at NCEA, IB and CIE.

Sign up to elearneconomics for multiple choice test questions (many with coloured diagrams and models) and the reasoned answers on Interest Rates and Inflation. Immediate feedback and tracked results allow students to identify areas of strength and weakness vital for student-centred learning and understanding.

How to write AS and A2 essays in Economics

A timely reminder about essay writing for economics as we approach our mid year school exams. This is in preparation for the real thing in September / October. Below is a mindmap on economic systems (market economy) which could be useful as an essay plan. I have also attached a document on writing Economics essays – goes through the important aspects of what Cambridge are looking for – Knowledge, Application, Analysis and Evaluation. Click below:

Source: CIE A Level Revision – Susan Grant

New Zealand labour market post COVID

Below are figures and a graph for the NZ labour market from 2020 – 2022. Although the unemployed figures have fallen to 3.2% of the working population, the drop in those actively looking for work – participation rate – have fallen by a similar amount. The number of those employed increased although matched by the change in the working age population. This gives the impression that people who were previously unemployed in 2020 have not got a job, but are not making themselves available for work. Notice the difference in the graph between the growth in employment and the unemployment rate from 2020 onwards. Also the majority of extra jobs in the economy have been full-time roles as employers struggled to find labour.

Below is a flow chart that shows how you calculate the participation rate, unemployment rate etc with some older figures. This is important for MCQ as well as essays on the labour market.

Sign up to elearneconomics for multiple choice test questions (many with coloured diagrams and models) and the reasoned answers on Unemployment. Immediate feedback and tracked results allow students to identify areas of strength and weakness vital for student-centred learning and understanding.

Turkish inflation hits 73.5% but not surprising.

Most economists are in agreement that when there is an increase in inflation the central bank increases the base interest rates in order to reduce spending and encouraging saving. This takes money out of the circular flow and should lead to less borrowing and therefore less pressure on prices.

The Turkish lira dropped by 17% this year with three cuts in interest rates since September. This comes as inflation has climbed to 73.5%. So why would you drop interest rates when you have rapidly increasing inflation? President Erdogan sacked the governor of the head of central bank Naci Agbal who had been hiking interest rates to dampen down inflation – he was the third governor to lose his job in the last two years. Erdogan believes that raising interest rates would raise inflation rather than reduce it and he proceeded to cut rates further which saw an even steeper decline in the lira. An argument for this policy could be that the cheaper exports can drive economic growth.

Source: FT4th June 2022

The collapse of the lira make exports competitive and imports more expensive and in September Turkey posted a current account surplus thanks in large to a recovery in tourist numbers. Turkey relies heavily on imports of raw materials and energy and with the exchange rate falling these have become a lot more expensive. Although Turkish exports should be cheaper, the heavy import component of finished exports makes those goods more expensive so this outweighs the benefits of having a cheaper lira – e.g. in assembling kitchen appliances the price of imports of the component parts make the overall price of the appliance more expensive. This just fuels more inflation. Supermarkets are limiting customers to one item as they know people will stockpile produce with the ever increasing inflation rate.

So with inflation now at 73.5% and and interest rates at 14% this makes real interest rates = – 59.5%. The central bank kept its benchmark interest rate at 14% at its May meeting, extending a pause that followed 5% of cuts last year. This has led to the local population to turn to other currencies – US$ Euro – in order to protect the value of their money. Below is a very good video clip from Deutsche Welle (German World Service) outlining the crisis that Turkey face and how a policy of cutting interest rates has backfired.

‘The Trinity College VIII’ – amusing book on rowing

Getting away from economics and with my interest in rowing, I can recommend a very entertaining book written by my brother-in-law David Hickey. David was a member of the Trinity College (part of Dublin University) VIII that won the Ladies Plate at the Henley Royal Regatta in 1977 – the Ladies Plate is seen as the World Championships for University VIII’s.

One of the 1977 Ladies Plate crew members has written a lighthearted account of the crew’s three year campaign to try to win the event. While it deals amusingly with some of their outrageous non rowing adventures, the sections on the changes within Trinity College during those years, and especially the descriptions of rowing in general, and racing in particular, are dealt with in a far more serious vein.

Below is an interview with David about the book on the Rowing Chat podcast.

You can purchase the book from the Dublin University Boat Club website which means that they get to keep 50% of the proceeds which they can then put towards their boat funding needs.

https://duboatclub.com/book/

If you are in New Zealand just email me – m.johnston@kingscollege.school.nz – and I can arrange for delivery. You will therefore save on significant postage costs.

The impact of a tighter monetary policy.

Below is a CNBC video on the impact of higher interest rates which is now the case in many developed economies. As post-covid demand surges and supply chain problems exacerbate, inflation has started to impact many economies with higher prices and a cost of living crisis. In order to control this inflationary pressure central banks around the world have been forced to adapt a more contractionary monetary policy which means higher interest rates. The Reserve Bank of New Zealand even gets a mention. Good for revision of the flow on effects in an economy from higher interest rates.

Housing affordability in New Zealand

I blogged on this topic earlier in the year and found it interesting that although mortgage repayments have become more affordable it is the deposits which people find hard to muster mainly due to the significant increase in house prices over the years. Below is an informative graphic about housing affordability in New Zealand.

Over the last 20 years mortgages have become much more affordable even with the increase in house prices mainly due to lower interest rates. Remember even though house prices were lower 20 years ago the interest payments were much higher. Today we have seen much lower interest rates and higher house prices but it also should be noted that the banks have got much more flexible mortgage plans that allow buyers to spread payments over many years which means lower weekly payments.
*Mortgage affordability is measured by the weekly cost of servicing a two year fixed rate mortgage at a normal house price compared to the change in median income.

Deposit affordability is key
Note that it is the deposit which is much less affordable but the mortgage payments are much more affordable. It is twice as hard to get a deposit on a house on a median income than it was 20 years ago. Therefore those that can muster a deposit find the repayments very affordable. The increase in house prices has become a major problem to those trying to muster a deposit – higher house price = higher deposit. Therefore unless incomes rise with house prices deposit affordability becomes out of reach for many.

Source: WSBG Commerce Teachers’ Professional Development Day 2021

“New Zealand housing market: the importance of interest rates and urban land supply”, Dominick Stephens, Deputy Secretary, Chief Economic Advisor at The Treasury

Is Green growth rather than degrowth the way forward?

Martin Sandbu of the Financial Times in his Free Lunch on Film produced a very good video (see below) on how, with the help of technology, the global economy can be decarbonised without impacting on what is seen as normal growth rates. He travels to his native Norway where Oslo has around 30% of all its passenger cars being EV’s. The key to its success has been to make EV’s as affordable and attractive as conventional cars. Policies of tax exemptions on EV’s, lower tolls, cheaper parking and taxes on polluting vehicles have directed consumers to the cleaner option. He goes on to talk about the Kaya Identity. This is the relationship between four factors:

  • Global carbon dioxide emissions, in carbon dioxide (CO2);
  • Global primary energy consumption, in Ton of Oil Equivalent (TOE);
  • GDP, in dollars ($);
  • Global population, in billions.

In other words global CO2 emissions from a human source = global population x quality of life x energy intensity x intensity of carbon in the energy mix.

  • GDP/Per Capita: represents the total value of output in an economy divided by the population
  • Energy/GDP: represents the energy intensity, i.e. the amount of energy used (in kWh) necessary to create a monetary unit, meaning to manufacture a product or provide a service. This intends to encourage us to rationalise our use of energy.
  • CO2/energy: represents the intensity of carbon in the global energy mix. This relationship demands a reduction in CO2 emissions in the production of energy, in particular through the promotion of energies low in carbon, such as renewable energy.

So from Kaya we can decarbonise in 3 ways:

  • shrink the world’s population.
  • limit and reduce incomes.
  • lower the amount of CO2 emitted for each dollar of GDP.

In some areas, like ground transport, it’s technologically feasible, even easy, to take the carbon out. In other areas, it’s more costly, more difficult, maybe even impossible to do by 2050: flying, cement making, meat production. The video is well worth the time to watch.

Negative externalities of consumption and how much sugar in a Coke?

Negative externalities of consumption is where the consumption of a good may have spillover costs or negative externalities for others e.g. passive smoking, drink driving, sugary drinks. If left to the free market goods that have negative externalities of consumption will be under priced (Pm) and over consumed (Qm) compared to the socially desirable price (Ps) and quantity (Qs). At Qm the MSC > MSB therefore the quantity needs to reduce until the MSC=MSB. The government could tax the good, increasing its price and lowering the level of consumption back to more socially desirable levels.

Source: Elearneconomics

Coke and how much sugar?

The video clip below, although a bit old, is from the BBC Newsnight Programme in which Jeremy Paxman interviews President of Coca Cola Europe James Quincey. How much sugar is in a cup of Coke? A ‘small’ cinema serving is said to contain 23 teaspoons on sugar, while a large contains 44 – ‘each to be consumed in a single sitting.’ You can see the amount of sugar for yourself when Paxman pours out the sachets in each cup. Like with the tobacco industry quite a few years ago, the pressure is now on drink companies to reduce the amount of sugar in drinks because of the negative externalities of consumption that are associated with it.

Externalities on elearneconomics has written answers that allows students to recall information and apply it to assessment style questions. Immediate feedback allows for true student-centred learning and understanding.

The Beveridge Curve and COVID-19

There are those that see the problem of unemployment in most economies (but especially the US) as a structural issue. This refers to the mismatch between the jobs that are available and the skills that people have. Cyclical unemployment can be reduced by boosting demand – dropping taxes and increasing government spending (fiscal policy) and lowering interest rates (monetary policy). However, if unemployment is mainly structural patience is needed to wait for the market to sort things out, and this takes time.

The Beveridge curve is an empirical relationship between job openings (vacancies) and unemployment. It serves as a simple representation of how efficient labour markets are in terms of matching unemployed workers to available job openings in the aggregate economy. Economists study movements in this curve to identify changes in the efficiency of the labour 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 – see graph below.

Careful analysis of Beveridge Curve data by economists Murat Tasci and John Lindner at the Cleveland Federal Reserve shows that it’s behaving much the way it has in previous recessions: there are as few job vacancies as you’d expect, given how desperate people are for work – see graph below. The percentage of small businesses with so-called “hard-to-fill” job vacancies is near a twenty-five-year low, and open jobs are being filled quickly. And one recent study showed that companies’ “recruiting intensity” has dropped sharply, probably because the fall-off in demand means that they don’t have a pressing need for new workers.

The Beveridge Curve and COVID

The graph below shows the Beveridge Curve pre and post covid. The pre-covid curve is a typical which relates to theory above, however the post-covid curve has become a lot steeper in showing that changes in the unemployment rate are not as responsive to changes in the vacancies. If the matching process between workers and firms becomes less efficient,  employers need to post more vacancies to fill a given number of positions. In terms of the model, an outward shift of the Beveridge curve can therefore be explained by a decline in match efficiency. Since match efficiency has declined, any reduction in unemployment now requires a much higher job opening rate than before the pandemic. During the pandemic, job creation has become more difficult, and firms have had to recruit more aggressively to find workers. Looking forward, a reduction of the unemployment rate to pre-COVID levels would require job openings to be at twice the level they were before.

Beveridge Curve Covid

Source: Revisiting the Beveridge Curve: Why has it shifter so dramatically. Economic Brief October 2021