Beveridge curve

A Beveridge curve, or UV curve, is a graphical representation of the relationship between unemployment and the job vacancy rate, where the number of unfilled jobs expressed as a proportion of the labor force. Typically, vacancies are on the vertical axis and unemployment on the horizontal. The curve, named after William Beveridge, is hyperbolic-shaped and slopes downward, as a higher rate of unemployment normally occurs with a lower rate of vacancies. If it moves outward over time, a given level of vacancies would be associated with higher and higher levels of unemployment, which would imply decreasing efficiency in the labor market, which can be driven by mismatches between available jobs and the unemployed and an immobile labor force.

Beveridge curve of vacancy rate and unemployment rate data from the United States Bureau of Labor Statistics

The position on the curve can indicate the current state of the economy in the business cycle. For example, recessionary periods are indicated by high unemployment and low vacancies, corresponding to a position on the lower side of the 45° line, and high vacancies and low unemployment indicate the expansionary periods on the upper side of the 45° line.

In the United States, following the Great Recession, there was a marked shift in the Beveridge curve. A 2012 International Monetary Fund (IMF) said the shift can be explained in part by "extended unemployment insurance benefits" and "skill mismatch" between unemployment and vacancies.^[1]: 2 Again, after the COVID-19 pandemic, there was a marked shift outward in the US Beveridge curve, as workers were let go and eventually there was rehiring activity in different geographies and sectors.^[2] A number of recent economic studies have found nonlinearities between the ratio of vacancies to the unemployment rate, both variables plotted by the curve.^[3][4]

History

In 1944, William Beveridge, in Full Employment in A Free Society, argued that fluctuating unemployment levels are driven by changes in demand for workers.^[5] This implied a negative relationship between the number of job openings and the unemployment rate.^[6] Because the curve enabled economists to analyze many of the problems that Beveridge had addressed, including the mismatch between unemployment and vacancies, at aggregate and sector levels, the curve was most likely named for him in the 1980s.^[7]

Beveridge never created a visual representation of the curve, and was instead first graphically depicted in 1958 by Christopher Dow and Leslie Arthur Dicks-Mireaux.^[8][9] They were interested in measuring excess demand in the goods market for the guidance of Keynesian fiscal policies and took British data on vacancies and unemployment in the labor market as a proxy, since excess demand is unobservable. By 1958, they had 12 years of data available since the British government had started collecting data on unfilled vacancies from notification at labor exchanges in 1946. Dow and Dicks-Mireaux presented the unemployment and vacancy data in an unemployment-vacancy (UV) space and derived an idealized UV-curve as a rectangular hyperbola after they had connected successive observations.

The UV curve, or Beveridge curve, enabled economists to use an analytical method, later known as UV-analysis, to decompose unemployment into different types of unemployment: deficient-demand (or cyclical) unemployment and structural unemployment. In the first half of the 1970s, that method was refined by economists of the National Institute of Economic and Social Research (NIESR), in London, so that a classification arose that corresponded to the 'traditional' classification: a division of unemployment into frictional, structural and deficient demand unemployment, according to a 1976 analysis.^[10] Both the Beveridge curve and the Phillips curve bear implicit macroeconomic notions of equilibrium in markets, but the notions are inconsistent and conflicting.^[11]

Movements

The Beveridge Curve can move for the following reasons:

• The matching process determines the efficiency of matching workers to open roles - or matching supply and demand in the labor market. Improvements in the matching system would shift the curve towards the origin, as an efficient matching process allows workers to jobs faster, filling vacancies and employing the unemployed. Improvements can be made by increasing the mobility of labor, the introduction of agencies, such as job centers, and lower rates of unionization, according to a 2001 article on OECD that compared unemployment and wages in the OECD from the 1960s to the 1990s.^[12]
• Skills mismatches occur when there are changes in the skills employers demand versus the available skills held by workers within the labor pool. Greater skills mismatches increases inefficiency in the labor market, and thus shifts the Beveridge curve outward. If that were the driving factor behind the shift, one would expect to also see employers bid up wages for the few candidates who were desirable. Although the US Beveridge curve shifted outward in the 2010–2012 period, wages did not increase.^[13]
• Labor force participation rate (LFPR), which measures the number of individuals searching for a job, will effect the rate of unemployment. Those workers who stop searching for work are excluded from the unemployment rate. Therefore, as LFPR decreases, the unemployment rate decreases. LFPR has been declining in the US since the early 2000s.^[14] This long term unemployment may be driven by deteriorating human capital or a negative perception of the unemployed by the potential employers.^[13] Contrarily, as the number of individuals looking for jobs increases relative to the total population, the unemployment rate increases, shifting the curve outwards from the origin. Labor force participation may increase due to changes in education, gender roles, population age and immigration.
• Frictional unemployment: Frictions result from the failure of the assumptions that both workers and employers know of all existing opportunities in the labor market and that contracting at a new job is costless.^[15] Because labor markets are not perfectly competitive, there are some frictions as individuals and firms search for new matches. Economists, therefore, measure the difference between the average unemployment rate and the frictional unemployment rate as the rate of technical efficiency of the labor market.^[16] Frictional unemployment can be caused by unexpected or involuntary job losses, resignations and job creation.
• Economic and policy uncertainty may cause employers to hold vacancies open longer in the search for the perfect candidate, acute during periods of high unemployment, where the number of candidates is high. Uncertainty tends to shift the curve outward.^[13]

Skills vs. aggregate matching

Skill shortages should not be confused with labor shortages. What distinguishes an objective shortage of labor from a skill-related shortage (i.e. a special case of skill mismatch) is the presence of a pool of unemployed individuals (non-discouraged job seekers) willing to take up jobs in the labor market considered at the ongoing rate. Nevertheless, even in presence of unemployment, and assuming that there is adequate demand for labor in the market, a skill shortage may be difficult to identify for at least two reasons:

1. Identifying the source of observed unemployed is difficult. It may be frictional, due to short-run costs of searching. It may be driven by fluctuations in the business cycle, or it may be structural, such that there are sector or activity level changes in the economy.
2. Skill shortages may be caused by both "horizontal" skill mismatch, when workers have qualifications different than the one required by the firms, or by "vertical" skill mismatch, where workers' skills and qualifications are lower levels than what firms require.

Economists generally believe that labor markets adjust to such imbalances, especially over time, but it is also possible for such mismatches to persist for many years or decades. Public policy interventions to change or improve the match of workers to employers might be appropriate in such cases.

Connection to other macroeconomic theories

Recent economic theory has linked the Phillips curve to the Beveridge curve. Particularly, the Phillips curve tells us that economic growth leads to a tightening of labor supply and subsequently, an increase in prices. Historically, economists have used the unemployed rate to measure this labor market tightness, but more recently the ration between vacancies and unemployed individuals, the V/U (or U/V), has demonstrated a better fit to empirical applications.^[17] This improvement is driven by the movements in the Beveridge curve, particularly the matching frictions.^[18]

See also

• labor economics
• Search theory
• Matching theory
• Types of unemployment
• Phillips curve
• Involuntary unemployment