By Stephen Williamson, Vice President and Economist
This post is the first of a two-part series exploring slack in the labor market. The second post, “Labor Market Slack and the Insured Unemployment Rate” will appear on Tuesday, Nov. 3.
In some discussions of the current state of the U.S. labor market, it is argued that there is more “slack” in U.S. labor markets than might be apparent. For example, some argue that the unemployment rate, which stood at 5.1 percent in September, does not fully reflect hidden unemployed, such as discouraged workers (those who have stopped searching for work and have dropped out of the labor force) and those who are working part time but would prefer to work full time.
In modern models of labor market search,1 which help economists explain labor market behavior, a typical measure of labor market tightness is the ratio v/u, where v is the number of vacancies posted in the labor market and u is the number of unemployed. According to this measure, which is depicted in the following figure, the labor market is tighter the greater the number of firms seeking to fill jobs relative to the number of would-be workers looking for jobs.
By this measure, the U.S. labor market is as tight as it has been at any time between the past two recessions.
Another way to look at labor market tightness is to plot the labor market vacancy rate against the unemployment rate. Such a scatter plot traces out what is known as the Beveridge curve, depicted in the next figure.
In this scatter plot, the line joins observations from December 2000 to July 2015, from the top left-hand corner to the lower right-hand corner, and back. A key feature of the scatter plot is the curve’s shift to the right that occurred during the Great Recession (December 2007 through June 2009). Some economists have argued that this shift is due to “mismatch unemployment.”2 The idea is that the Great Recession created a greater mismatch between the skills desired by firms and the skills offered on the market by would-be workers....MORE