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

 

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