Beveridge curve
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A Beveridge curve is a graphical representation of the relationship between unemployment and the job vacancy rate (the number of unfilled jobs expressed as a proportion of the labor force). It typically has vacancies on the vertical axis and unemployment on the horizontal; it slopes downwards as a higher rate of unemployment normally occurs with a lower rate of vacancies. If it moves outwards over time, then a given level of vacancies would be associated with higher and higher levels of unemployment, which would imply decreasing efficiency in the labour market. Inefficient labour markets are due to mismatches between available jobs and the unemployed and an immobile labour force.
The position on the curve can indicate the current state of the economy in the business cycle. For example, the recessionary periods are indicated by high unemployment and low vacancies, corresponding to a position on the lower side of the 45 degree line, and likewise high vacancies and low unemployment indicate the expansionary periods, above the 45 degree line.
The Beveridge Curve can move for the following reasons:
- The matching process will determine how efficiently workers find new jobs. Improvements in the matching system would shift the curve towards the origin, because an efficient matching process will find jobs faster- filling vacancies and employing the unemployed. Improvements can be the introduction of agencies (‘job centres’), lower rates of unionisation[1], and increasing the mobility of labour.
- Labour force size; as the number looking for jobs increases, the unemployment rate increases, shifting the curve outwards from the origin. Labour force size can increase due to changes in the participation rate, population age and immigration.
- Long-term unemployment will push the curve outward from the origin. This could be caused by; deterioration of human capital or a negative perception of the unemployed by the potential employers.
- Frictional unemployment; a decrease in frictions would reduce the number of firms searching for employees and the number of unemployed searching for jobs. This would shift the curve towards the origin. Frictional unemployment is due to job losses, resignations and job creation.
The curve is named after William Beveridge (1879-1963).
