1. The Beveridge curve
– The Beveridge curve plots the relationship between unemployment and job vacancies. Cyclical variations in aggregate demand tend to move unemployment and job vacancies in opposite directions, whereas structural shifts would be expected to move vacancies and unemployment in the same direction. For instance, a structural mismatch between businesses’ hiring needs and the skills of unemployed workers would tend to push up the level of vacancies for a given level of unemployment. Figure 3 plots the co-movement of unemployment and job vacancy rates since 2007.5 Consistent with a substantial decline in aggregate demand, followed by some modest recovery, movements in unemployment and vacancies since 2007 display a predominantly inverse relationship. However, figure 3 shows that as job vacancies have risen during the recovery, unemployment has declined by less than might have been expected based on the relationship that prevailed during the contraction. This outcome has led some to suggest that the Beveridge curve has shifted outward, reflecting an increase in the extent of job mismatch. In my view, a portion of this apparent outward shift in the Beveridge curve reflects increases in the maximum duration of unemployment benefits, which have been important in buffering the effects of the weak labor market on workers and their families. The influence of these benefits will dissipate as they are phased out and the economy recovers. In addition, loop-like movements around the Beveridge curve are common during recoveries. Vacancies typically adjust more quickly than unemployment to changes in labor demand, causing counterclockwise movements in vacancy-unemployment space that can look like shifts in the Beveridge curve”. Figure 4 plots the relationship seen during and after the 1973 and 1982 recessions alongside the current episode. As can be seen, such counterclockwise movements also occurred during these two earlier deep recessions (A NEW IDEA FOR RESEARCH)
See more at: See John Lindner and Murat Tasci (2010), “Has the Beveridge Curve Shifted?” Economic Trends (Cleveland: Federal Reserve Bank of Cleveland, August), ; and Rob Valletta and Katherine Kuang (2010), “Is Structural Unemployment on the Rise?” FRBSF Economic Letter 2010-34 (San Francisco: Federal Reserve Bank of San Francisco, November),
2. Okun’s law
Puzzle at 2011
” Figure 5 plots changes in the unemployment rate against real GDP growth–a simple portrayal of the relationship known as Okun’s law. It is evident from the figure that 2011 is something of an outlier, with the drop in the unemployment rate last year much larger than would seem consistent with real GDP growth below 2 percent. One possibility, highlighted by Chairman Bernanke in a recent speech, is that last year’s decline in unemployment represents a catch-up from the especially large job losses during late 2008 and 2009.7 According to this hypothesis, employers slashed employment especially sharply during the recession, perhaps out of concern that the contraction could become even more severe; in particular, the figure shows that in 2009, the unemployment rate rose by considerably more than the decline in GDP would have suggested. Then, last year, employers may have become confident enough in the recovery to increase hiring and relieve the unsustainable strain that the earlier cutbacks had placed on their workforces. I think the evidence is consistent with this hypothesis, and I have incorporated it into my own modal forecast.
If last year’s Okun’s law puzzle was largely the result of such a catch-up in hiring, I would expect progress on the unemployment front to diminish unless the pace of GDP growth picks up. After all, catch-up can go on for only so long. Of course, there are other conceivable explanations for this puzzle, including some that would point to a faster decline in unemployment in coming years. For example, GDP could have risen more rapidly over the past year than current data indicate. It will be important to pay close attention to indicators of both the labor market and GDP to try to gauge the likely pace of improvement in economic activity going forward and, hence, the appropriate stance of monetary policy over time.”
Source: Janet L. Yellen(2012), “The Economic Outlook and Monetary Policy”, At the Money Marketeers of New York University, New York, New York. http://www.federalreserve.gov/newsevents/speech/yellen20120411a.htm#f6
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