Evening Must-Read: Peter Diamond: Unemployment: On the Beveridge Curve

Peter Diamond: Video: Unemployment “Debates about higher structural unemployment…

…occur when unemployment has stayed high. With monthly publication of the US Beveridge curve (the relationship between the unemployment and vacancy rates), the recent debate has focused on the shift in the Beveridge curve and whether the shift will be lasting long enough to move the full-employment point. The curve appears stable through the NBER identified business cycle through in June 2009 or possibly the month of the maximal unemployment rate in October 2009. This shift in the Beveridge curve, with the economy experiencing a higher level of unemployment than before for the same level of the vacancy rate, suggests a deterioration in the matching/hiring process in the economy. It is tempting to interpret this decline as a structural change in the way that the labor market works and thus assume that it is orthogonal to changes in aggregate demand. Indeed, an assumption that a shift in the curve is structural has been a staple of the academic literature since at least 1958. This interpretation has an obvious policy implication: however useful aggregate stabilization policies while unemployment is very high, they are likely to fail in lowering the unemployment rate all the way to the levels that prevailed before the recession, since the labor market is structurally less efficient than before in creating successful matches. This lecture reviews the theory underlying the Beveridge curve and US evidence on the ability to draw an inference of structural change from its shift or a shift in the hiring (matching) function. | Mark Thoma: Economist’s View: A Conversation with Peter Diamond