Beveridge curve

What Is the Beveridge Curve?

The Beveridge curve is a graphical representation in macroeconomics that illustrates the inverse relationship between the unemployment rate and the job vacancies rate within an economy. As a core concept in labor economics, it typically shows job vacancies on the vertical axis and the unemployment rate on the horizontal axis. A downward-sloping Beveridge curve indicates that periods of high unemployment are generally associated with low job vacancies, and vice versa. This relationship helps economists assess the efficiency with which the labor market matches job seekers with available positions.,⁴⁰

History and Origin

The concept behind the Beveridge curve is attributed to British economist William Beveridge. In his influential 1944 work, Full Employment in a Free Society, Beveridge observed that fluctuating levels of unemployment were related to changes in the demand for workers., He posited an inverse relationship between the number of open jobs and the number of unemployed individuals. While Beveridge himself did not create a visual graph of this relationship, the curve was later graphically depicted in 1958 by Christopher Dow and Leslie Arthur Dicks-Mireaux, who utilized British data on vacancies and unemployment. The curve was likely named after him in the 1980s due to its utility in analyzing labor market problems Beveridge had addressed, such as mismatches between unemployment and vacancies.

Key Takeaways

The Beveridge curve graphically shows the inverse relationship between the unemployment rate and the job vacancy rate.
Its downward slope reflects that high vacancies typically accompany low unemployment, and vice versa, in a healthy labor market.³⁹
Movements along the curve signify changes in the business cycle, with the economy shifting between expansionary and recessionary phases.,
Shifts of the entire curve indicate changes in the efficiency of the job-matching process, often due to structural factors like skills mismatches or geographic immobility.³⁸,³⁷
Monitoring the Beveridge curve offers critical insights into the overall health and dynamics of the labor force and broader economic conditions.³⁶,³⁵

Formula and Calculation

While the Beveridge curve is primarily a graphical representation, its underlying relationship can be broadly expressed in the context of a labor market matching function. Conceptually, it represents combinations of unemployment (U) and vacancies (V) that produce a given level of hires for a specific matching efficiency. In a simplified theoretical model, the product of unemployment and vacancies can be considered constant for a given level of labor market efficiency, forming a hyperbolic shape:³⁴

$U \times V = A$

Where:

(U) = Unemployment rate
(V) = Job vacancy rate
(A) = A constant reflecting the efficiency of the job-matching process (a higher A implies lower efficiency, shifting the curve outward).³³

This formulation is based on search and matching models in labor economics, where the number of successful matches between job seekers and vacancies depends on the total number of unemployed individuals and job openings.³²

Interpreting the Beveridge Curve

The interpretation of the Beveridge curve hinges on distinguishing between movements along the curve and shifts of the curve.

Movements Along the Curve: As an economy moves through its economic cycle, the economy moves along the curve. During an economic recession, there is typically high unemployment and low job vacancies, placing the economy on the lower-right portion of the curve. Conversely, during periods of economic expansion, job vacancies increase, and unemployment falls, moving the economy towards the upper-left part of the curve, indicating a "tight" labor market.,³¹,³⁰
Shifts of the Curve: A shift of the entire Beveridge curve signifies a change in the underlying efficiency of the job-matching process, reflecting structural changes in the labor market.,²⁹
- Outward Shift (Rightward): An outward shift means that for any given level of job vacancies, the unemployment rate is higher than before, or vice versa. This indicates decreased efficiency in matching workers to jobs. Factors contributing to an outward shift include increased structural unemployment (e.g., skills mismatches between available jobs and workers, or geographical immobility), long-term unemployment, or changes in labor force participation.,²⁸,²⁷ For example, after the Great Recession, the U.S. Beveridge curve shifted outward, partly attributed to a deterioration in matching efficiency.²⁶
- Inward Shift (Leftward): An inward shift implies increased labor market efficiency, where a lower unemployment rate is achieved for a given number of job vacancies. This could result from improvements in job search technology, better training programs, or enhanced information flows in the job market.²⁵,²⁴

Hypothetical Example

Imagine a country, "Diversifica," whose labor market can be analyzed using the Beveridge curve.

Scenario 1: Economic Downturn (Movement Along the Curve)
In late 2024, Diversifica experiences a slowdown. Businesses reduce hiring, leading to a significant drop in new job vacancies. Concurrently, layoffs increase, causing the unemployment rate to rise. On the Beveridge curve, Diversifica moves from a point of low unemployment and high vacancies (e.g., 3% unemployment, 6% vacancy rate) to a point of high unemployment and low vacancies (e.g., 8% unemployment, 3% vacancy rate) along the existing curve. This movement reflects a cyclical change in the economy, driven by shifts in aggregate demand.

Scenario 2: Structural Shift (Outward Shift of the Curve)
A few years later, Diversifica's economy recovers, but the labor market struggles to regain its previous efficiency. Despite a rising number of job vacancies, the unemployment rate remains stubbornly high. For instance, the vacancy rate returns to 6%, but the unemployment rate only falls to 5% instead of the pre-downturn 3%. This indicates a shift in the entire Beveridge curve outward (to the right). This shift might be due to a significant technological advancement that has created a skills mismatch, where many unemployed workers lack the specific skills required for the new job openings, or perhaps stricter regulations have reduced labor mobility. This suggests a deterioration in the efficiency of the job-matching process.

Practical Applications

The Beveridge curve is a valuable tool for economists and policymakers to understand and respond to the dynamics of the labor market.

Economic Health Assessment: By observing the position and movement of the Beveridge curve, economists can gauge the overall health of the economy. A curve closer to the origin (lower unemployment and lower vacancies for a given efficiency) suggests a more efficient labor market.²³
Business Cycle Analysis: Movements along the curve provide insights into the current phase of the business cycle. A move toward the upper-left indicates an expansionary phase, while a shift toward the lower-right signals an economic recession.²²
Policy Implications: Shifts in the Beveridge curve can inform monetary policy and fiscal policy decisions. If the curve shifts outward, policymakers might investigate the root causes, such as skills gaps or geographical barriers, and implement targeted interventions like worker training programs or job placement services to improve matching efficiency.²¹ For instance, the Job Openings and Labor Turnover Survey (JOLTS) data, compiled monthly by the U.S. Bureau of Labor Statistics (BLS), is a primary source for tracking the number of job vacancies and other labor market indicators necessary to plot the Beveridge curve.²⁰,¹⁹ This data is widely used to assess labor demand and turnover. The official BLS JOLTS news releases provide the latest figures and trends, which are crucial for real-time analysis of the curve's behavior.¹⁸

Limitations and Criticisms

While insightful, the Beveridge curve has limitations and has faced criticisms, particularly regarding shifts that defy simple explanations.

Structural Shifts: The most significant criticism often revolves around the curve's tendency to shift, indicating changes in matching efficiency that are not always easily attributable to cyclical factors. These shifts can be caused by various structural changes, such as an increase in long-term unemployment, a change in the composition of the labor force, or evolving requirements for specific skills due to technological advancements.¹⁷,¹⁶ For example, following the 2008 Great Recession, the U.S. Beveridge curve saw a marked outward shift, prompting economists to analyze potential causes, including extended unemployment benefits and skill mismatches.,¹⁵
Poaching Vacancies: Recent research highlights that not all job vacancies are equal. Some firms create vacancies specifically to "poach" workers from other employers rather than hiring from the unemployed pool. These "poaching vacancies" primarily affect job-to-job transitions and do not necessarily reduce the unemployment rate, potentially causing the Beveridge curve to behave in "very unusual" ways, such as becoming flatter or more vertical in certain segments.¹⁴,¹³ This phenomenon, particularly observed since 2015, complicates the traditional interpretation of the curve.¹²
Dynamic Nature: The curve is not a static relationship; underlying behaviors of workers and firms regarding skill accumulation, hiring, and wage setting indirectly influence the curve's position and shape.¹¹ This dynamic nature means that the Beveridge curve itself is not a structural economic relationship but rather an outcome of complex labor market interactions.¹⁰ Researchers at Brookings have analyzed how the Beveridge curve behaves during and after significant economic events, noting its shift post-Great Recession and its implications for persistent unemployment.⁹

Beveridge Curve vs. Phillips Curve

The Beveridge curve and the Phillips curve are two distinct, yet related, macroeconomic tools used to analyze different aspects of the labor market and the economy. Both are often depicted as downward-sloping relationships, but they plot different variables and reveal different insights.

Beveridge Curve: This curve, as discussed, plots the inverse relationship between the unemployment rate and the job vacancies rate. It primarily reflects the efficiency of the job-matching process. A movement along the Beveridge curve indicates changes in the supply and demand for labor due to the business cycle, while shifts in the curve suggest structural changes affecting matching efficiency.
Phillips Curve: In contrast, the Phillips curve illustrates the historical inverse relationship between the unemployment rate and the rate of inflation. It suggests that periods of low unemployment are typically associated with higher inflation, and vice versa. This relationship is often considered in the context of the trade-off policymakers face between controlling inflation and promoting full employment.

While distinct, recent economic theory has explored the connections between the two. Labor market tightness, measured by the ratio of vacancies to unemployment (V/U ratio), has been shown to be a better predictor for the Phillips curve's behavior than the unemployment rate alone, especially in tight labor markets.⁸ This connection implies that changes in the Beveridge curve, particularly "matching frictions" (inefficiencies in connecting workers and jobs), can influence the dynamics of the Phillips curve.⁷,⁶ The Federal Reserve Bank of San Francisco offers further insights into the relationship between these two critical macroeconomic curves.⁵

FAQs

What does a shift in the Beveridge curve mean?

A shift in the entire Beveridge curve indicates a change in the efficiency of the job-matching process in the economy. An outward (rightward) shift means that for any given level of job vacancies, the unemployment rate is higher, suggesting inefficiencies like skills mismatches or reduced labor mobility. An inward (leftward) shift implies improved matching efficiency.⁴

How does the Beveridge curve relate to the business cycle?

The Beveridge curve moves along its downward slope during the business cycle. During an expansion, job vacancies are high and the unemployment rate is low, placing the economy on the upper-left side of the curve. During a recession, vacancies are low, and unemployment is high, moving the economy to the lower-right side.

What causes the Beveridge curve to shift outward?

An outward shift of the Beveridge curve indicates that the labor market is becoming less efficient at matching job seekers with available positions. Common causes include an increase in structural unemployment due to skills mismatches, geographical barriers, extended unemployment benefits that might reduce search intensity, or a change in the willingness of workers to switch jobs, sometimes reflected in an increase in "poaching" vacancies.,³,²

Is there a "natural" Beveridge curve?

Similar to the concept of a natural rate of unemployment, there's an implicit "natural" Beveridge curve or an underlying relationship between vacancies and unemployment at equilibrium, often linked to the output gap. This curve represents the efficient operation of the labor market given its structural characteristics. Deviations from this "natural" curve can signal imbalances.¹

How is data for the Beveridge curve collected?

In the United States, data for the Beveridge curve, particularly on job vacancies, comes primarily from the Job Openings and Labor Turnover Survey (JOLTS), conducted monthly by the U.S. Bureau of Labor Statistics (BLS). This survey collects data on job openings, hires, and separations from a large sample of businesses and government offices. The unemployment rate is derived from the Current Population Survey.