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Beveridgean Unemployment Gap

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  • Pascal Michaillat
  • Emmanuel Saez

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.

Suggested Citation

  • Pascal Michaillat & Emmanuel Saez, 2019. "Beveridgean Unemployment Gap," Papers 1911.05271, arXiv.org, revised Nov 2021.
  • Handle: RePEc:arx:papers:1911.05271
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    References listed on IDEAS

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    Cited by:

    1. Hie Joo Ahn & Leland D. Crane, 2020. "Dynamic Beveridge Curve Accounting," Papers 2003.00033, arXiv.org.
    2. Joshua Bernstein & Alexander W. Richter & Nathaniel A. Throckmorton, 2022. "The Matching Function and Nonlinear Business Cycles," Working Papers 2201, Federal Reserve Bank of Dallas.
    3. Shisham Adhikari & Athanasios Geromichalos & Ioannis Kospentaris, 2023. "How much work experience do you need to get your first job? The macroeconomic implications of bias against labor market entrants," Working Papers 357, University of California, Davis, Department of Economics.
    4. Juan C. Córdoba & Anni T. Isojärvi & Haoran Li, 2023. "Endogenous Bargaining Power and Declining Labor Compensation Share," Finance and Economics Discussion Series 2023-030, Board of Governors of the Federal Reserve System (U.S.).
    5. Alex Domash & Lawrence H. Summers, 2022. "How Tight are U.S. Labor Markets?," NBER Working Papers 29739, National Bureau of Economic Research, Inc.

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    More about this item

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • J63 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Turnover; Vacancies; Layoffs
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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