Uncertainty and the slow labor market recovery

Uncertainty
and the Slow Labor
Market Recovery
Yi-Hung Peng, Tou-Te Tsai, Yu-Chieh Chiang
2013.11.1

Reporting Process
1

The Beveridge curve: Past and present

2

Measuring shifts in the Beveridge curve

3

Effects of policy uncertainty on shifts in the Beveridge curve

4

Conclusion

3

1

The Beveridge curve:
Past and present


The history of Beveridge curve
The Beveridge curve, or UV-curve, was developed in 1958 by
Christopher Dow and Leslie Arthur Dicks-Mireaux.
The Beveridge curve enabled economists to employ an
analytical method for the decomposition of unemployment:
deﬁcient-demand (or cyclical) unemployment
and structural unemployment.

5


Likely because the Beveridgecurve enabled economists to
analyze the problems Beveridge
addressed,
the curve was named in the
1980s after William Beveridge.

6

al
y
t is

yed
his

nt
nty

me
e

Figure 1
Figure 1: Actual and ﬁtted Beveridge
Actual and fitted Beveridge curve

curve

Job openings rate (%)
5
Fitted
4

3

Since 2007
recession
Before 2007
recession

2

1
3

5

7
Unemployment rate (%)

9

Sources: Job Openings and Labor Turnover Survey (JOLTS), Daly et al.

11

7

5
Fitted
4

3

Since 2007
recession
Before 2007
recession

2

1
3

5

7

9


11

8

5

v

Fitted
4

3

Since 2007
recession
Before 2007
recession

2

1
3

5

7

9


11

8

5

v

Fitted
4

3

Since 2007
recession
Before 2007
recession

2

1
3

5

7

9

u


11

8

5

v

Fitted Beveridge curve
4

3

Since 2007
recession
Before 2007
recession

2

1
3

5

7

9

u


11

8

5

v

Fitted Beveridge curve
4

Data
3

Since 2007
recession
Before 2007
recession

2

1
3

5

7

9

u


11

8

Unemployment typically
fell as job openings rose

v
u
Before 2007
recession
9

Although job openings
rose, unemployment fell
more sluggishly.

v
u

Since 2007
recession

10

Figure 1
5
Fitted

Since late 2007, the Beveridge
curve has gradually shifted outward

4

3

Since 2007
recession
Before 2007
recession

2

1
3

5

7

9

11

11

5
Fitted

Since late 2007, the Beveridge
curve has gradually shifted outward

4

3

Since 2007
recession
Before 2007
recession

2

What has caused this shift

1
3

5

7

9

11

12

What has caused this shift Previous Explanation

13

1

“Beveridge curve may reﬂect a mismatch between the
skills unemployed workers have and what employers
are looking for.”

13

1

are looking for.”
Recent research suggests that skill mismatch is
probably not a main driving force

13

1

are looking for.”

2

“The expansion of unemployment insurance beneﬁts”
EX:the 2008 extension of unemployment compensation.

13

1

are looking for.”

2

Unemployment insurance beneﬁts have been
reduced over the past two years.
13

1

are looking for.”

2


Policy Uncertainty

14

2

Measuring shifts
in the Beveridge curve

A rise in the level of uncertainty about ﬁscal and monetary
policy is a third possible explanation for the shift in the
Beveridge curve.

16

A rise in the level of uncertainty about ﬁscal and monetary
policy is a third possible explanation for the shift in the
Beveridge curve.

“

”

We need an economic model of the labor market.

16


!! = ! !! !!

!

!!!

!! !!

−

!
!!! !!!
!
!

!

!
!=

!
Ω!!!

!

!!

17


!! = ! !! !!

!

!! !!

!!!

!

! m denotes new matches (hires) being formed
t

!=

!
Ω!!!

!

!!

−

!
!!! !!!
!
!
17


!! = ! !! !!

!

!! !!

!!!

!

t

unemployment (u)

!=

!
Ω!!!

!

!!

−

!
!!! !!!
!
!
17


!! = ! !! !!

!

!! !!

!!!

!

t

unemployment (u)

!
Ω!!!

job vacancy rate (v)

!=

!

!!

−

!
!!! !!!
!
!
17


!! = ! !! !!

!

!! !!

!!!

!

t

unemployment (u)

!
!
μ is= Ω!!! capturing (true) match!!! !!! !
a scale parameter ! !! − ! efﬁciency
!

17


!! = ! !! !!

!

!! !!

!!!

!

t

unemployment (u)

!
!
!

at denotes ﬁrms’ recruiting intensity (for example, advertising)

17


!! = ! !! !!

!

!! !!

!!!

!

t

unemployment (u)

!
!
!

st denotes the search intensity of unemployed workers

17


!! = ! !! !!

!

!! !!

!!!

!

t

unemployment (u)

!
!
!

(variables for the beveridge curve shifter)

st denotes the search intensity of unemployed workers

17

mple, advertising).


Imposing the steady-state relation:

hat
where deno
he Beveridge curve
mt denotes new matches (hires) being formed
unemployment (u)
18

mple, advertising).


Imposing the steady-state relation:

hat
where deno
he Beveridge curve
δ denotes the job separation rate
mt denotes new matches (hires) being formed
unemployment (u)
18

ensity (for example, advertising).

-state relation that
where denotes
xpression for the Beveridge curve
!
!!!
!! = ! !! !! !! !!
!

!
1−α

a

).

!=

!
Ω!!!

!

!!

−

!
!!! !!!
!
!

uced-form representation of all factors that can shift
19


where denotes
xpression for the Beveridge curve
!
!!!
!! =! ! !! ! ! !! !! !!! !
! !!
!
!
! =
!

!
1−α

a

).

!

!

! !

! !

The expression for the Beveridge curve
!
!

!=

!=

Ω!!!
!

Ω!!!

!

!

!!

!!

−

!!! !!!
!
!
!

−

!!! !!!
!
!

uced-form representation of all factors that can shift
19


(1)

where mt denotes new matches (hires) being formed,
denotes
match efficiency, st denotes the whereintensity of un
search
xpressionfirms’the Beveridge curveexample, advertising)
for recruiting intensity (for
!

!!!

!! =! ! !! ! ! !! !! !!! !
! !!
!
!
!! =
!! !
! !
Imposing the steady-state relation that
!

1−α

a

).

!rate, The expression forexpression for the Beveridge curv
we obtain the the Beveridge curve!
!
!=

!=
(2)

Ω!!!
!

Ω!!!

!

!

!!

!!

−

!!! !!!
!
!
!

−

!!! !!!
!
!

( of all. factors curve shifter shift
) Beveridge that can
uced-form representation
α 1−α

where Ω ≡ δ / µ s a

19

(2)


(

α 1−α


).

The term is a reduced-form repre
μ a scale
Weis callparameter capturing (true) match efﬁciency
the “Beveridge curve sh
a denotes ﬁrms’ recruiting intensity (for example, advertising)
Beveridge curve. unemployed workers
s denotes the search intensity of
t

t

20

(2)


(

α 1−α


).

Ω is the “Beveridge curve shifter”, the reduced-form
representation of all factors that can shift the Beveridge curve

μ a scale
t

t

20

(2)


(

α 1−α


).

Ω is the “Beveridge curve shifter”, the reduced-form
representation of all factors that can shift the Beveridge curve
Increased Ω leads to an outward shift in the curve.

μ a scale
t

t

20

al
y
t is

yed
his

nt
nty

me
e

Figure 1
Figure 1: Actual and ﬁtted Beveridge

curve

5
Fitted
4

3

Since 2007
recession
Before 2007
recession

2

1
3

5

7

9


11

21

Imposing the steady-state relation tha
rate, we obtain the expression for the
(2)

Since 200
recessio

Beveridge curve shifter:
Original State

(

α 1−α


).

The term is a reduced-form repres
We call the “Beveridge curve shift
Beveridge curve.

We construct a time series for usin
Beveridge curve relation in equation
job separation rate is taken from th
the U.S. Bureau of Labor Statistics.
22

Imposing the steady-state relation tha
rate, we obtain the expression for the
(2)

Beveridge curve shifter:
Increase Ω→Outward shift

(

α 1−α


).

Since 2
recess

The term is a reduced-form repres
We call the “Beveridge curve shift
Beveridge curve.

We construct a time series for usin
Beveridge curve relation in equation
job separation rate is taken from th
the U.S. Bureau of Labor Statistics.
23

(2)

(

α 1−α


).

Increased Ω leads to an
outward shift in the curve.

The term is a reduced-form representat
We call the “Beveridge Since 2007
curve shifter.”
recession
Beveridge curve.

We construct a time series for using da
Beveridge curve relation in equation (2),
job separation rate is taken from the 24
Job


Policy Uncertainty

25


Policy Uncertainty
Newspaper articles discussing economic policy uncertainty

25


Policy Uncertainty
Tax code provisions scheduled to expire

25


Policy Uncertainty
Tax code provisions scheduled to expire
The extent of disagreements among economic forecasters
about such variables as future levels of inﬂation and
government spending

25

ve
s

on

he

Figure 2
Figure 2: Beveridge curve shifter and policy uncertainty
Beveridge curve shifter and policy uncertainty
Index
3.0
2.5

Percent
7.0

Recruiting intensity
(left axis)

6.5
6.0

2.0
1.5

5.5
Policy uncertainty
(left axis)

5.0
4.5

1.0
0.5

Beveridge curve shifter
(right axis)

0.0
00 01 02 03 04 05 06
Note: Three-month moving average.

4.0
3.5
3.0

07

08

09

10

11

12

26

2.5
2.0

and the job vacancy rate (v), can be derived from a general matc
following form(left axis)
(see Pissarides 2000, chapter 5):
6.5
6.0

(1)

5.5

where mt denotes uncertainty (hires) being formed, µ is a scale
Policy new matches
5.0
1.5 match efficiency, s denotes the search intensity of unemployed
(left axis)
t
firms’ recruiting intensity (for example, advertising).
4.5
1.0

4.0

relation that (right axis)
where
3.5

0.5 Imposing

the steady-state
rate, we obtain the expression for the Beveridge curve

0.0

3.0

00 01 02 03 04 05 06
(2)

07

08

09

10

11

12


(

α 1−α

)

.
to a higher unemployment rate for a given number of job

27

d

efficiency is a broad concept that encompasses a range of variables,
from filling vacancies, thereby raising unemployment. An estimate indicates that, without policy
ecruit new employees. If the process of matching workers and jobs
uncertainty, the unemployment rate in late 2012 would have been close to 6.5%, 1.3
curve shifts to the right, meaning that, for a given job vacancy rate,
percentage points lower than the actual rate.
her.


loyment rate and the vacancy rate to quantify changes in job match
The U.S. labor market has recovered more slowly following the Great Recession than after previous
t we call the “Beveridge curve shifter.” In Figure 2, the blue line
recessions. Historically, the unemployment rate tends to fall as job openings increase, a relationship
Beveridge curve shifter has increased substantially, consistent with
urve displayed in Figure 1.represented graphically by the Beveridge curve. However, even though the number of job openings in the

economy has been rising during the recovery, the unemployment rate has remained stubbornly high. As
onomic policy uncertaintya result, asby Baker, Bloom, and Davis
developed Figure 1 shows, the Beveridge curve has shifted away from its historical pattern. There are
now more jobless workers for a given number of job openings than in the decade before the downturn.
lume of newspaper articles discussing economic policy uncertainty,

heduled to expire, and the extent of disagreements among economic

Researchers have suggested several
Figure 1
Figure 2
reasons for this shift. Workers may
Beveridge curve shifter and policy uncertainty what is
not have the skills that match
Index
Percent Job openings rate (%)
needed for current job openings. 7.0 5
3.0
Alternatively, more generous
Fitted
(left axis)
6.5
2.5
unemployment benefits may have
n
4
6.0
reduced the pressure on unemployed
2.0
5.5
individuals to search for jobs. In this
Policy uncertainty
Economic Letter, we propose an 5.0 3
1.5
(left axis)
Since 2007
alternative explanation. We present
recession
4.5
1.0
evidence that heightened uncertainty
Before 2007
recession
about economic policy during the 4.0 2
0.5
e
(right axis)
recovery made businesses more
3.5
reluctant to hire workers. When
0.0
3.0
1
businesses become
00 01 02 03 uncertainty rises,08 09 10 11 12
04 05 06 07
3
5
7
9
11
more hesitant to hire. They reduce
recruiting efforts by raising hiring
(2012), and authors’ calculations.
ads to a higher unemployment rate for a given number of job
standards, increasing the number of
ge curve outward. The green dashed line in Figure 2 indicates that,
interviews, or simply not filling vacancies. For instance, some businesses may interview candidates

28

efficiency is a broad concept that encompasses a range of variables,
from filling vacancies, thereby raising unemployment. An estimate indicates that, without policy
ecruit new employees. If the process of matching workers and jobs
uncertainty, the unemployment rate in late 2012 would have been close to 6.5%, 1.3
curve shifts to the right, meaning that, for a given job vacancy rate,
percentage points lower than the actual rate.
her.


loyment rate and the vacancy rate to quantify changes in job match
The U.S. labor market has recovered more slowly following the Great Recession than after previous
t we call the “Beveridge curve shifter.” In Figure 2, the blue line
recessions. Historically, the unemployment rate tends to fall as job openings increase, a relationship
Beveridge curve shifter has increased substantially, consistent with
urve displayed in Figure 1.represented graphically by the Beveridge curve. However, even though the number of job openings in the

economy has been rising during the recovery, the unemployment rate has remained stubbornly high. As
onomic policy uncertaintya result, asby Baker, Bloom, and Davis
developed Figure 1 shows, the Beveridge curve has shifted away from its historical pattern. There are
now more jobless workers for a given number of job openings than in the decade before the downturn.
lume of newspaper articles discussing economic policy uncertainty,

Policy Uncertainty & Beveridge curve shifter

heduled to expire, and the extent of disagreements among economic

Researchers have suggested several
Figure 1
Figure 2
reasons for this shift. Workers may
Beveridge curve shifter and policy uncertainty what is
not have the skills that match
Index
Percent Job openings rate (%)
needed for current job openings. 7.0 5
3.0
Alternatively, more generous
Fitted
(left axis)
6.5
2.5
unemployment benefits may have
n
4
6.0
reduced the pressure on unemployed
2.0
5.5
individuals to search for jobs. In this
Policy uncertainty
Economic Letter, we propose an 5.0 3
1.5
(left axis)
Since 2007
alternative explanation. We present
recession
4.5
1.0
evidence that heightened uncertainty
Before 2007
recession
about economic policy during the 4.0 2
0.5
e
(right axis)
recovery made businesses more
3.5
reluctant to hire workers. When
0.0
3.0
1
businesses become
00 01 02 03 uncertainty rises,08 09 10 11 12
04 05 06 07
3
5
7
9
11
more hesitant to hire. They reduce
recruiting efforts by raising hiring
(2012), and authors’ calculations.
ads to a higher unemployment rate for a given number of job
standards, increasing the number of
ge curve outward. The green dashed line in Figure 2 indicates that,
interviews, or simply not filling vacancies. For instance, some businesses may interview candidates

28

3

Effects of policy
uncertainty on shifts
in the Beveridge curve


“

How much heightened policy uncertainty may
have contributed to this shift?

”

V

U

Ω

Job vacancy rate

Unemployment rate


Policy uncertainty
30

s of uncertainty on the unemployment rate in our theoretical model,

ge
cy
e
he
id

ly
n

ty
the

Figure 3
Figure 3: Policy uncertainty and shifts in the Beveridge
Policy uncertainty and shifts in the Beveridge curve

curve

5
Fitted
4
Since 2007 recession
implied by policy uncertainty
3

Since 2007
recession
Before 2007
recession

2

1
3

5

7
9
Sources: JOLTS, Daly et al. (2012), and authors’ calculations.

11

31

7

Part of the Beveridge curve
that has been driven by policy
uncertainty, based on
estimates we put into our
statistical model.


Since
rece
32

Part of the Beveridge curve
that has been driven by policy
uncertainty, based on
estimates we put into our
statistical model.

However, beginning in autumn
2009, policy uncertainty
became an increasingly
important factor behind the
shift in the Beveridge curve.

Since 2007
recession

33


Heighted uncertainty may have contributed to the shift
Our results suggests that, in late 2012, if there had been no
policy uncertainty shocks, The unemployment rate would have
been close to 6.5% instead of the reported 7.8%.

34


Conclusion

35


Conclusion

All else equal

35


Conclusion

All else equal

Increase in
policy
uncertainty

35


Conclusion

All else equal

Increase in
policy
uncertainty

Signiﬁcant
decline in
recruiting
intensity

35

Conclusion

In an uncertain economic environment, businesses reduce
their recruiting intensity.
As the economy recovers and uncertainty recedes, the
Beveridge curve should return to its pre-recession position and
the pace of job recovery should accelerate.

37

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Uncertainty and the slow labor market recovery

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