Tuesday, July 9, 2013

Beveridge Curve still indicates reduced labor market efficiency

Here is an updated Beveridge Curve for the US labor markets (discussed here). Just as a reminder, it's a plot of job vacancy rate vs. the unemployment rate. The period prior to and during the Great Recession has the typical hyperbolic shape, showing the declining job vacancies corresponding to higher unemployment rate.

The post-recession plot however follows a different path, which implies lower efficiency of the labor market. It indicates that we have mismatches between the job openings and the unemployed workers. It may for example be the result an immobile labor force due to underwater mortgages and workers' inability to sell their home in order to relocate for a job opening. It may also indicate a skills mismatch in the post-recession jobs market. Researchers at Barclays felt that it has to do with high levels of long-term unemployment, because those who have been out of work for too long have a tougher time returning into the workforce - even if there are more openings. All these factors point to structural rather than cyclical labor force adjustments.

Whatever the case, the Beveridge Curve is certainly moving in the right direction but remains on its "lower efficiency" return path.

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