The US labor market does not operate efficiently
In this paper, Michaillat and Saez develop an unemployment-gap measure along the lines of the sufficient-statistic method from public economics presented in Raj Chetty’s “Sufficient Statistics for Welfare Analysis: A Bridge Between Structural and Reduced-Form Methods” 2009 paper. They obtain the sufficient-statistic formula by solving the problem of a social planner who allocates labor between production, recruiting, and unemployment subject to the Beveridge curve. The formula gives the efficient unemployment rate as a function of actual unemployment and vacancy rates, and three statistics: the elasticity of the Beveridge curve, social cost of unemployment, and cost of recruiting. The formula has three advantages: a) the three statistics are estimable; b) the formula requires little theoretical structure; and c) it applies to any labor market with a Beveridge curve, irrespective of the structure of the labor market, production, preferences, wage setting, and shocks. They estimate the three statistics for the US and find:
- The unemployment gap is countercyclical;
- The US unemployment gap is almost never zero: the US labor market does not operate efficiently;
- The unemployment gap is generally positive, averaging 1.4 percentage points over 1951–2019, so the US labor market is generally inefficiently slack;
- In slumps, the unemployment gap is especially high, reaching for instance 6.2 percentage points in 2010 in the aftermath of the Great Recession, so inefficiencies are exacerbated.
Beveridgean Unemployment Gap
Authors: Pascal Michaillat, Emmanuel Saez
From: Brown University, University of California–Berkeley
How to interpret the Beveridge curve
In this paper Ahn and Dod use a standard model to show that three factors can shift the Beveridge curve: a) reduced-form matching efficiency; b) changes in the job separation rate; and c) out-of-steady-state dynamics. They find that the shift in the Beveridge curve during and after the Great Recession was due to all three factors, and each factor taken separately had a large effect. In particular, out-of-steady state dynamics produced a net upward shift in the Beveridge curve during and after the Great Recession while the changes in the separation probability pushed the curve downward. The net effect was the observed upward shift in the empirical Beveridge curve.
They argue that these three factors affect the slope of the empirical Beveridge curve, an important feature in recent welfare analyses estimating the natural rate of unemployment. In comparison to the above model of Michaillat and Saez, Ahn and Dod’s estimated unemployment gap is 50% smaller.
Dynamic Beveridge Curve Accounting
Authors: Hie Joo Ahn, Leland Dod Crane
From: Board of Governors of the Federal Reserve System
