A Beveridge curve, or UV-curve, is a graphical representation of the relationship between unemployment and the job vacancy rate (the number of unfilled jobs expressed as a proportion of the labor force). It typically has vacancies on the vertical axis and unemployment on the horizontal. The curve is named after William Beveridge and it is hyperbolic shaped and slopes downwards as a higher rate of unemployment normally occurs with a lower rate of vacancies. If it moves outwards over time, then a given level of vacancies would be associated with higher and higher levels of unemployment, which would imply decreasing efficiency in the labour market. Inefficient labour markets are due to mismatches between available jobs and the unemployed and an immobile labour force.
The position on the curve can indicate the current state of the economy in the business cycle. For example, the recessionary periods are indicated by high unemployment and low vacancies, corresponding to a position on the lower side of the 45 degree line, and likewise high vacancies and low unemployment indicate the expansionary periods, above the 45 degree line.
History of the Beveridge curve
The Beveridge curve, or UV-curve, was developed in 1958 by Christopher Dow and Leslie Arthur Dicks-Mireaux. They were interested in measuring excess demand in the goods market for the guidance of Keynesian fiscal policies and took British data on vacancies and unemployment in the labour market as a proxy, since excess demand is unobservable. By 1958 they had twelve years time series data available since the British Government had started collecting data on unfilled vacancies from notification at labour exchanges in 1946. Dow and Dicks-Mireaux presented the unemployment and vacancy data in an unemployment-vacancy (UV) space, and derived an idealized UV-curve as a rectangular hyperbola after they had connected successive observations. The UV-curve, or Beveridge-curve, enabled economists to employ an analytical method—which later became known as UV-analysis—for the decomposition of unemployment into different types of unemployment: into deficient-demand (or cyclical) unemployment and structural unemployment. In the first half of the 1970s this method was refined by economists of the National Institute of Economic and Social Research (NIESR) in London, so that a classification arose that corresponded to the ‘traditional’ classification: a division of unemployment into frictional, structural, and deficient demand unemployment. Both the Beveridge-curve and the Phillips-curve bear implicit macroeconomic notions of equilibrium in markets, though these notions are inconsistent and conflicting. Most likely because the Beveridge-curve enabled economists to analyze many of the problems Beveridge addressed, such as, mismatch between unemployment and vacancies, both at aggregate level and industry levels, trend versus cyclical changes and measurement problems of vacancies, the curve was named in the 1980s after William Beveridge. Beveridge, however, never drew the curve and the exact origin of the name remains obscure.
Movements of the Beveridge-curve
The Beveridge Curve can move for the following reasons:
- The matching process will determine how efficiently workers find new jobs. Improvements in the matching system would shift the curve towards the origin, because an efficient matching process will find jobs faster- filling vacancies and employing the unemployed. Improvements can be the introduction of agencies (‘job centres’), lower rates of unionisation, and increasing the mobility of labour.
- Skills mismatches occur when changes in the skills employers want differ from the available skills in the labour pool. Greater mismatches would shift the Beveridge Curve outward. If this were the driving factor behind the shift, one would expect to also see employers bid up wages for the few candidates who were desirable. Although the U.S. Beveridge Curve shifted outward in the 2010-2012 period, wages did not increase.
- Labour force participation rate; as the number looking for jobs increases relative to total population, the unemployment rate increases, shifting the curve outwards from the origin. Labour force participation can increase due to changes in education, gender roles, population age and immigration.
- Long-term unemployment will push the curve outward from the origin. This could be caused by; deterioration of human capital or a negative perception of the unemployed by the potential employers.
- Frictional unemployment; a decrease in frictions would reduce the number of firms searching for employees and the number of unemployed searching for jobs. This would shift the curve towards the origin. Frictional unemployment is due to job losses, resignations and job creation.
- Economic and policy uncertainty may cause employers to hold vacancies open longer in the search for the "perfect candidate," particularly when there is high unemployment with a large number of candidates from which to choose. More uncertainty would tend to shift the curve outward.
Skill shortages should not be confused with ‘labor shortages’ which identify an objective lack of workers in the market, independently of their skills, and it may arise because of limited geographical mobility, ageing populations or a labor market approaching full employment during an economic boom. Along with labor surpluses, labor shortages are one of the most traditional examples of labor market imbalances. It should be noted that what distinguishes an objective shortage of labor from a skill-related shortage (i.e. a special case of skill mismatch) is just the presence of a pool of unemployed individuals (i.e. non-discouraged jobseekers) willing to take up jobs in the labor market considered at the ongoing rate. Nevertheless, even in presence of unemployment and assuming that there is an adequate demand for labor in the market, it could still be difficult to point to a skill shortage for at least two reasons: (i) if we are not able to establish whether the unemployment we observe is frictional (i.e. just a short-run consequence of costly ‘search’), cyclical (i.e. due to the business cycle) or structural ; (ii) if we are not able to determine whether the position offered is accessible and/or attractive (e.g. whether or not the wage posted is competitive or, at least, rising with respect to other segments of the market that are not reporting unmet labor demands). In addition, skill shortages may be caused by both ‘horizontal’ skill mismatch – when workers have qualifications/skills which are different than the one required by the firms – or by ‘vertical’ skill mismatch – when workers’ skills and qualifications are of a lower level with respect to what firms require. In the literature, scholars have also referred to skill mismatch (and sometimes even to skill shortages) to define a situation in which the skills of the employed workers and those required by their jobs were different. To avoid any possible confusion, we will refer to this form of mismatch affecting only employed individuals as ‘on-the-job’ mismatch, in the more general case where workers can be both over and under skilled for their jobs (vertical on-the-job mismatch) or have different skills/qualifications (horizontal on-the-job mismatch), and as skill gap to refer to employed workers whose skills are lower than those required by their jobs. It follows that skill mismatch, as we are defining it, can result in the occurrence of both skill shortages and on-the-job mismatches (both vertical and horizontal). Economists generally believe that labor markets adjust to such imbalances, especially over time. But it is also possible that such mismatches can persist for many years or decades. In such instances, adverse equilibria characterized by higher level of structural unemployment, long-term unfilled vacancies and/or lower labor force participation may arise and employers may eventually be forced to hire workers who possess lower or just different skills, giving place to the mismatch ‘on the job’. Public policy interventions to change or improve the match of workers to employers might be appropriate in such cases.
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