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Friday, May 10th, 2013

The UK and US Labour Markets: Still Ill, Different Diseases
posted by Brian Biggs

The UK and US labour markets have both been in a dreadful state for sometime now.  Unemployment rates on both sides of the Atlantic are nowhere near their pre-recession levels and, even though both markets are showing some signs of improvement, many commentators have become resigned to a "new normal" of higher (non-inflationary) unemployment.

One way of analysing patterns in labour market dynamics is to look at the Beveridge Curve, which plots the unemployment rate against the job vacancy rate (i.e. the number of job openings over the size of the labour force).  Beveridge Curves are typically downward-sloping.  When jobs are plentiful, unemployment tends to be low; when jobs are scarce, it’s harder to find employment.

The Great Recession pulled the UK and US labour markets from the high vacancy, low unemployment end of the Beveridge Curve to the low vacancy, high unemployment end.  The Beveridge Curve for the year June 2008 – June 2009 shows a distinct migration across unemployment-vacancy plot.

Figure 1 UK Beveridge Curve: Jan 2002 - Feb 2013


Source: Office of National Statistics, Bloomberg, Europe Economics

In the UK, higher unemployment has been associated with lower vacancies, as theory would predict.

Figure 2 US Beveridge Curve: Jan 2002 - Mar 2013

Source:  Bureau of Labor Statistics, Bloomberg, Europe Economics

In the US, however, a given level of the vacancy rate today implies a much higher unemployment rate today than it did before the recession.  For example, between January 2002 and May 2008, a vacancy rate of 2.5 per cent was associated with an unemployment rate of around 5.5 to 6 per cent.  From July 2009 onwards, that same vacancy rate was realised where unemployment sat around 8 to 8.5 per cent.  In other words, the Beveridge Curve has shifted outwards.

There are a number of reasons why this can happen, and no one reason can explain the entire shift.  One argument is that there is a structural mismatch between jobseekers and employers in the US.  It might be that the workforce simply doesn’t have the skills necessary to fill the vacant jobs.  If skills aren’t the problem, there could be a geographical separation between where the workers are and where the jobs are.  The relative illiquidity of the post-recession housing market, for instance, could inhibit labour mobility.

Alternatively, the shift could be the result of hold-outs in the labour market.  On the labour supply side, workers, who have been able to claim unemployment benefits for a longer period of time, might be holding out to find a better job.  On the labour demand side, employers could be delaying hiring decisions in hopes that a better candidate will apply or until growth expectations rise.  Workers who are chronically unemployed could find that their skills — actual or perceived — have deteriorated to such a point that employers are unwilling to give them a chance.  A Boston Fed paper argues this is what we’ve seen recently in the US, where, they argue, the Beveridge Curve has shifted outwards only for the chronically unemployed.

Estimated Beveridge Curves using data from the pre- and post-recession observed Beveridge Curves suggest that the US Beveridge Curve has indeed shifted to the right.  It also flattened, indicating additional frictions in the labour market.

Figure 3 Pre- and post-recession estimated linear UK and US Beveridge Curves

Source:  Bureau of Labor Statistics, Office of National Statistics, Bloomberg, Europe Economics

This is markedly different from what we’ve seen in the UK over a similar time period.  Instead of shifting outward, the post-recession estimated UK Beveridge Curve has actually shifted inward, which should indicate an improvement in labour market conditions.  With unemployment stubbornly lingering around the 8 per cent mark since early 2009, however, it would be hard to argue that there have been improvements.  Nevertheless, patterns in the current, post-recession relationship between unemployment and job vacancies don’t seem to have undergone the structural shift we see in the US.

Instead, the primary driver of patterns in the UK Beveridge Curve is a lack of job vacancies to absorb unemployed workers or workers returning to the labour market. 

The UK and US labour markets bottomed out in the summer of 2009.  Since then, UK job vacancies have picked up modestly, growing by roughly 15 per cent to date.  This pales in comparison to the US, which has seen job vacancies increase by around 74 per cent over the same period.

Figure 4 Job vacancies in the UK and the US, Jan 2002 - Feb 2013

Source:  Bureau of Labor Statistics, Office of National Statistics, Bloomberg, Europe Economics

So while the UK and US continue to struggle with unemployment, the underlying causes are distinct.  In the US, there are plenty of vacancies, but a breakdown between the process of matching employers with employees has kept them unfilled.  The anti-clockwise movement in the US Beveridge Curve is typical of post-recession labour market dynamics, and may even point to a future recovery.

In the UK, there has been less of a recent structural shift in labour market dynamics, though evidence suggests there has been in some sectors, notably technology.  Of course, we won’t really know if there’s been a shift in the UK Beveridge Curve until the vacancy rate begins ticking upwards, allowing for a comparison of unemployment rates for the same level of the vacancy rate.  Once this happens, we might see that matching in the UK labour market has broken down as well, as the IMF has suggested.  Nevertheless, the more immediate problem facing the UK — apart from the productivity puzzle, which demands a separate blog post — is not how to slot workers into open jobs, but how to create those job openings in the first place.



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