Beveridge Curve

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Beveridge Curve

The term Beveridge curve describes the negative relationship between the unemployment rate and the vacancy rate in an economy’s equilibrium. It is named after William Henry Beveridge (1879–1963), a British economist and reformer and one of the preeminent inspirers of postwar British welfare state. His seminal reports to Parliament in 1942 and 1944 (Social Insurance and Allied Services and Full Employment in a Free Society ) promoted a comprehensive social program aimed at reaching full employment, and they laid the foundation for the later development of an improved social security system to support people “from the cradle to the grave,” as well as the National Health Service in Britain.

Labor markets in equilibrium are characterized by the coexistence of people seeking jobs and vacant jobs employers want to fill. This is the result of frictions that make the process of matching job seekers to job vacancies costly and time consuming. This process can be approximated through a matching function that relates the number of hires (or job matches) M to the number of unemployed workers U and job vacancies V:M=M(U, V ). The function is increasing in both arguments; that is, it assumes that the number of hires rises when more workers and employers search in the labor market. In equilibrium, when the number of job separations equals the number of matches, it is possible to identify a negative relationship between unemployment and job vacancies. This negative relationship is known in the literature as the Beveridge curve.

Cyclical labor market dynamics are commonly reflected by movements along the Beveridge curve. Expansions are characterized by higher vacancy rates and lower unemployment rates, whereas the opposite is true for contractions. Positive comovements of the job vacancy rate and the unemployment rate can be interpreted instead as the result of changes in the structural properties of the underlying job matching process—that is, in the capacity of the unemployed to be matched to job vacancies. These structural changes can be imputed to a number of factors, such as institutional change, mismatch between the skills of the unemployed and the skills required by new jobs, search effort, or effectiveness. According to this interpretation, a shift to the right of the Beveridge curve may be associated with an increase in equilibrium unemployment. Economic policy then should be aimed at increasing the effectiveness of job matching, shifting the Beveridge curve to the left and thus alleviating the underutilization of the available labor resources in the economy.

On the empirical side, there are a number of difficulties that complicate the estimation of a Beveridge curve. First, the researcher often lacks proper vacancy data and therefore resorts to vague approximations, using available series whose relationship with the vacancy rate may not be constant over time. Second, the pool of workers available for a match may include other categories of workers in addition to the unemployed, such as employed workers searching for new jobs, or even individuals only temporarily out of the labor force. Third, shifts in the Beveridge curve are usually hard to detect in a nonarbitrary way.

SEE ALSO Business Cycles, Empirical Literature; Macroeconomics; Unemployment; Unemployment Rate