US unemployment seems stuck at an unusually high level of 8%, prompting some to suggest a widespread skills mismatch. This column argues that a skills mismatch is not supported by the evidence. Rather, out of the possible explanations, it seems that any shift in the ratio between unemployment and vacancies is driven by either lower search efforts by the long-term unemployed or by a reduction in their employability.
The Beveridge curve – the empirical relationship between unemployment and vacancies – is thought to be an indicator of the efficiency of the functioning of the labour market. Normally when vacancies rise, unemployment falls following a curved path that typically remains stable over long periods of time. When vacancies rise and unemployment does not fall (or falls too slowly) this may be an indication of problems of structural mismatch in the labour market leading to an increase in the lowest unemployment rate that can be maintained without increasing inflation (the Non-Accelerating Inflation Rate of Unemployment (NAIRU).
Controversial interpretations of the data
The basic fact that recent ‘job vacancy, unemployment’ points lie outside the locus of points that seemed to define the Beveridge curve in the 2000s is not in dispute, but its interpretation has been controversial. Interpretations of the recent data range from a temporary cycling around a stable Beveridge curve due to the prolonged slow recovery from the Great Recession to a quasi-permanent shift of the Beveridge curve due to pervasive mismatch between the qualifications of job applicants demanded by employers and the qualifications offered by unemployed job searchers.
Figure 1 plots vacancy-unemployment points from 2001 on. The curved relationship between unemployment and vacancies depicted in Figure 1 is often called the Beveridge curve. Over the recession of the early 2000s, and the recovery from that recession, the vacancy-unemployment relationship remained remarkably constant, as it has for long periods of time in the past. However, in the recovery from the most recent recession we see that vacancies have grown considerably without producing the normal decline in unemployment. It looks as if the Beveridge curve may have shifted out. The figure displays an empirical relationship combining data on vacancies from the Job Openings and Labour Turnover Survey (JOLTS) with the aggregate unemployment rate obtained from the Bureau of Labor Statistics’ monthly household survey. The data span the period January 2001 through June 2012 and are seasonally adjusted. The solid line in Figure 1 reflects a stylised Beveridge curve that was estimated using data on unemployment and vacancy rates for the period prior to the start of the recession. The plot reveals that by September 2009, the vacancy-unemployment points started to deviate away from the fitted curve in an anti-clockwise direction indicating a higher unemployment rate at any given level of job openings.
Figure 1. Total vacancies and unemployment rates by unemployment duration
Disaggregating the vacancy-unemployment relationship reveals some interesting new facts that may shed light on the implications of what appears to be an outward shift of the Beveridge curve in recent years. While the Beveridge curve for all workers appears to be shifting out starting in 2009, data on vacancy and unemployment rates for individuals who have been unemployed for less than 27 weeks reveals the usual downward sloping relationship with no sign of any outward shift. Interestingly, a dynamic plot of the vacancy versus short-term unemployment rates shows clockwise cycling of the vacancy-unemployment points for those unemployed. In contrast, we see a large anti-clockwise movement when the vacancy rate is plotted versus the unemployment rate for those unemployed for more than 26 weeks. Taken together this suggests that the short-term unemployed are benefiting more than the long-term unemployed from increases in vacancies during the recovery.
Other than the contrast between the long- and short-term unemployed, we break down the vacancy-unemployment relationship by industry, education levels, age groups, and among both blue and white collar workers. In these decompositions we notice a similar pattern to what we see in Figure 1: there appears to be a breakdown in the vacancy unemployment relationship sometime at the trough of the recession.
We conclude that any explanation for the change in the vacancy unemployment relationship must account for its pervasiveness across different industry, blue-white collar occupations, age, and education groups, its concentration among the long-term unemployed and its absence from the short-term relationship.
- One reason that the Beveridge curve relationship for the long-term unemployed shifted may be a shift in the desirability of the long-term unemployed to employers.
It is possible that the long-term unemployed are increasingly made up of workers whose skills are not suited to available jobs. However, if this were the case why wouldn’t we see some outward shift in the short-term relationship as well? Furthermore, the fact that the vacancy-unemployment relationship has shifted in all industries when only the workers who were previously employed in those industries are considered calls the mismatch hypothesis into question as well.
- Another possibility is that the long-term unemployed in this recession may be searching less intensively, either because jobs are much harder to find or because of the availability of unprecedented amounts and durations of unemployment benefits.
This seems like a more likely explanation, though if a drop in search intensity is due only to difficulty finding jobs it again raises the question of why we wouldn’t see that at shorter durations as well.
Choosen excerpts by Job Market Monitor from
Krugman on the topics:
And as Brad DeLong suggests, this is very much consistent with a story in which long-term unemployment makes it hard to get back into employment — exactly the kind of thing we should fear, because it means that failure to address the slump is damaging the economy’s long-run prospects.
When trying to determine if high unemployment is being caused by weak demand or by a mismatch between jobs and the skills of job seekers, economists look at the Beveridge Curve. It represents the relationship between the unemployment rate and the job vacancy rate. On a simple chart, vacancies are on the vertical axis and unemployment … Continue reading »
The Report of the Inter-Departmental Committee on Social Insurance and Allied Services, known commonly as the Beveridge Report was an influential document in the founding of the Welfare Statein the United Kingdom. It was chaired by William Beveridge, an economist, who identified five “Giant Evils” in society: squalor, ignorance, want, idleness and disease, and went on to propose widespread reform to the … Continue reading »
Since the onset of the Great Recession, there has been a change in the relationship between the unemployment rate and vacancy rate in the U.S.” write Bart Hobijn and Aysegul Sahin in Beveridge Curve Shifts across Countries since the Great Recession on frbsf.org. (Choosen excerpts by JMM to follow) This relationship, summarized by the Beveridgecurve, was remarkably … Continue reading »
Mismatch across industries and occupations explains at most one-third of the total observed increase in the unemployment rate reveals a study by the Federal Reserve Bank of New York Study
“We develop a framework where mismatch between vacancies and job seekers across sectors translates into higher unemployment by lowering the aggregate job-finding rate” write Aysegul Sahin, Joseph Song, Giorgio Topa, and Giovanni L. Violante in Mismatch Unemployment on newyorkfed.org. How much did mismatch contribute to the dynamics of U.S. unemployment around the Great Recession? To address this question, we … Continue reading »
Bernanke : While I do not see much evidence of any significant increase in structural unemployment so far, I am concerned that structural unemployment could increase over time if the labor market heals too slowly–a phenomenon known as hysteresis. I do not interpret data suggesting an outward shift in the Beveridge curve as providing much evidence … Continue reading »
The authors estimate a DSGE model that features nominal rigidities and search frictions in the labor market. They evaluate the importance of mismatch shocks in accounting for the recent behavior of the Beveridge curve. Their fndings suggest that the rise in the unemployment rate during the Great Recession is mainly due to cyclical factors rather than to an increase in …Continue reading »