Beveridge redux | FT Alphaville

Beveridge redux

Maybe there’s not so much to this Beveridge Curve business after all.

As we’ve written previously, many economists and other observers have been discussing in recent months the rather large and persistent gap between job openings and the high unemployment rate, which was much higher than you would expect given the previous empirical relationship between the two.

To repeat ourselves a bit, although nobody was sure which variable was chiefly responsible for the deviation, the possibilities included:

1) A mismatch between the available jobs and the skills of the jobless
2) Reduced labour mobility because of homeowners stuck with underwater mortgages
3) The perceptions of employers towards the long-term unemployed
4) Jobless benefits that function as disincentives to working
5) The reluctance of employers to hire in the midst of a fragile economic recovery
6) Other stuff we haven’t thought of

But Dave Altig of the Atlanta Fed, who has analysed the deviation in some depth, on Thursday posted this chart from the Cleveland Fed’s Murat Tasci and John Lindner:

As you can see, and as Robert Waldmann has been saying all along, the pattern for this recession seems to be following those of recent, earlier recessions. In each case there was a lag between more job openings and the reduction in unemployment.

It’s hard to know exactly what to make of this, but Free Exchange probably has the right idea:

This makes sense; early in recovery the ratio of job seekers to job openings is quite high. As a result the matching process takes longer; firms have more applicants to sort through and more time to select the ideal candidate.

This doesn’t mean that structural factors can be ruled out anymore than the earlier view indicated that structural factors are driving unemployment. Frankly, it’s too early to tell. Given the many other signs indicating that low levels of demand are impairing labour market recovery, it’s also too early to give up on monetary stimulus.

In the meantime, Thursday’s economic data releases were less than comforting, and this is what the output gap in the US currently looks like:

The IMF’s André Meier, whose research we wrote about in early August, has shown not only that such persistent output gaps have historically created disinflationary pressures, but also that closing these gaps hasn’t resulted in runaway inflation.

As always, these historical patterns related to the Beveridge Curve and output gaps may not apply this time round, but they do lend support to the notion that further monetary loosening is unlikely to have harmful inflationary side effects.

Whether it will actually help much, and whether the Fed is willing to try it, are different questions.

Related links:
Just how curious is that Beveridge Curve?– Macroblog
What’s in this Beveridge?– FT Alphaville
How structural is unemployment? – Free Exchange
Stop the market – the Fed wants to get off– FT Alphaville