Beveridgean Unemployment Gap

TL;DR

This paper introduces a formula to measure the unemployment gap using key statistics, revealing that the US labor market is often inefficient, especially during economic downturns, which has implications for policy design.

Contribution

It develops a new sufficient-statistic formula for the unemployment gap based on the Beveridge curve, applicable to real-world data, and analyzes US labor market efficiency over time.

Findings

The efficient unemployment rate in the US averages 4.3%.

The unemployment gap reaches up to 6 percentage points during recessions.

The US labor market has been inefficient, particularly in economic slumps.

Abstract

This paper develops a sufficient-statistic formula for the unemployment gap -- the difference between the actual unemployment rate and the efficient unemployment rate. While lowering unemployment puts more people into work, it forces firms to post more vacancies and to devote more resources to recruiting. This unemployment-vacancy tradeoff, governed by the Beveridge curve, determines the efficient unemployment rate. Accordingly, the unemployment gap can be measured from three sufficient statistics: elasticity of the Beveridge curve, social cost of unemployment, and cost of recruiting. Applying this formula to the United States, 1951--2019, we find that the efficient unemployment rate averages 4.3%, always remains between 3.0% and 5.4%, and has been stable between 3.8% and 4.6% since 1990. As a result, the unemployment gap is countercyclical, reaching 6 percentage points in slumps. The US labor market is therefore generally inefficient and especially inefficiently slack in slumps. In turn, the unemployment gap is a crucial statistic to design labor-market and macroeconomic policies.