Should the Beveridge curve scare the Dickens out of us ?

Robert Waldmann

Brad DeLong and Paul Krugman consider the increase in the number of job vacancies to be bad news — to be a sign that long term unemployment has made it hard to increase employment even if there are vacant jobs. The high vacancies are held to be a sign of a problem which is more persistent and less absurdly easy to deal with than low aggregate demand.

I comment after the jump

One might imagine that high unemployment and high vacancy rates are, as you directly state, a bad sign as high unemployment combined with high vacancies lasts longer — that the combination is a sign of hysteresis from a) deteriorated jobs skills, or b)deteriorated work habits, or c) irrational stigma due to employers assuming a or be or d) missmatch.

I recall such a graph. It was the terrifying UK Beveridge curve from 1988-9 (look it up). The word (from among others Layard) was that unemployment had become almost impossible to fight as the long term unemployed were discouraged. Then employment took off.

The Beveridge curve is the lower envelope of a slightly more complicated dynamic with counterclockwise cycles above the curve. That’s a fancy way to say it takes a while after a labor demand trough to get the unemployed into the vacant jobs. You see a smaller shift in the matching function (hires as function of vacancies and unemployed). In the UK very late 80s you saw a shift in the matching function too.

That was just before the UK ceased to be an example of the European unemployment problem and became an example of well functioning labor markets in English speaking countries.

My reading is that when the market crashed in 87, Thatcher panicked and allowed the (not independent) bank of England to stimulate. So the economy took off. It took a while to into work down the huge stock of unemployed, but there was no sign of a bad tradeoff. Just further proof that her insane policies (until she miss-interpreted the crash of 87 as the crash of 29) were the problem.

Krugman shares your view and he does tend to be right, but still, I’m tempted to make a prediction.