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Economic Brief

September 2014, EB14-09

Putting the Beveridge Curve Back to Work
By Thomas A. Lubik and Karl Rhodes

After the recession of 2007–09, the Beveridge curve seemed to shift significantly outward as the job-vacancy rate increased with no corresponding
decrease in the unemployment rate. A new time-varying analysis of the
Beveridge curve from the early 1950s through 2011 could lend support to
the idea that skill mismatch due to technological change is the most likely
driver of the curve’s outward shifts, including its most recent movement.
This analysis suggests that expansionary monetary policy has done little
in recent years to reduce the unemployment rate.
The Beveridge curve reflects the highly negative
correlation between the job-vacancy rate and
the unemployment rate. When economists plot
these two variables on a graph with the unemployment rate on the x axis and the job-vacancy
rate on the y axis, the pattern consistently takes
the shape of a downward-sloping, concave curve.
(See Figure 1.)
This curve was developed by British economists
J.C.R. Dow and L.A. Dicks-Mireaux in 1958.1 Researchers started calling it the Beveridge curve in
the 1980s in honor of William Henry Beveridge,

Job-Vacancy Rate

Figure 1: The Stylized Beveridge Curve

another British economist who studied the difficulties of matching workers to jobs in the 1930s
and 1940s.2
The simple search-and-matching model of labor
markets explains movements along the Beveridge curve quite well. At the peak of a business
cycle, the unemployment rate is low, and the
job-vacancy rate is high, reflecting many unfilled
positions. As the economy slows, companies post
fewer vacancies, causing the job-vacancy rate to
decline and the unemployment rate to rise. This
combination produces a downward movement
along the Beveridge curve. At or near the bottom
of the business cycle, firms start posting more
vacancies again, causing the vacancy rate to
increase and the unemployment rate to fall. This
combination produces an upward move along
the Beveridge curve.
The Time-Varying Beveridge Curve
Federal Reserve Chair Janet Yellen once called
the Beveridge curve “the neglected stepsister of
macroeconomics.” She was commenting on research by MIT economists Olivier Jean Blanchard
and Peter Diamond, who noted in 1989 that the

Unemployment Rate

EB14-09 - Federal Reserve Bank of Richmond

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Beveridge curve “has very much played second fiddle”
to the Phillips curve. They declared that the Beveridge
curve “comes conceptually first and contains essential information about the functioning of the labor
market and the shocks that affect it. … Examination
of the joint movement of unemployment and vacancies can tell us a great deal about the effectiveness of
the matching process, as well as about the nature of
shocks affecting the labor market.”3
After the recession of 2007–09, the Beveridge curve
seemed to shift to the right as job vacancies increased substantially while the unemployment rate
remained elevated. This apparent deviation from the
two variables’ long history of negative correlation
caused the bottom of the Beveridge curve to develop
a large outward hook. (See Figure 2.) Some economists attributed this big hook primarily to expansions
and extensions of unemployment benefits, while
others attributed it primarily to a mismatch between

the skills that employers needed and the skills that
unemployed workers offered.4 This type of mismatch
occurs when technological change reduces demand
for commonly held basic skills while increasing demand for advanced skills that are harder to find.
Such an imbalance causes the unemployment rate
and the job-vacancy rate to rise simultaneously,
shifting the Beveridge curve to the right. This mismatch also might explain why the Federal Reserve’s
highly accommodative monetary policy seemed to
have little effect on the unemployment rate during
and after the recession.5
The large outward hook on the bottom of the Beveridge curve surprised many economists. The consistency of the curve had become the most robust
stylized fact in macroeconomics, but the big hook
following the recession of 2007–09 seemed to suggest that something had changed dramatically in
the labor market.

Figure 2: Evolution of the Beveridge Curve from Q4 2007 through Q4 2011

Job-Vacancy Rate (Percent)

Q4 2011

Q4 2007

3
4

8
7
Unemployment Rate (Percent)

Sources: Bureau of Labor Statistics, Conference Board Help-Wanted Index, and Barnichon’s extension of the index.
Note: The vacancy rate equals vacancies posted in the Help-Wanted Index and Barnichon’s extension divided by the number
of workers in the labor force. All data are seasonally adjusted.

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Given this intriguing twist in the data, one of the authors of this Economic Brief (Lubik) and Luca Benati, an
economist at the University of Bern, decided to study
the evolution of the Beveridge curve using a model
that allows for the possibility that the curve may have
changed over time.6 They built a Bayesian structural
vector autoregression model with time-varying
parameters. In other words, they created an empirical
model that describes the relationships between the
job-vacancy rate, the unemployment rate, and real
gross domestic product (GDP) from the early 1950s
through 2011. The model’s time-varying parameters
facilitate the analysis of period-by-period changes in
these relationships.
Benati and Lubik base the model’s job-vacancy rate
on the Conference Board Help-Wanted Index and
Régis Barnichon’s extension of it.7 They include real

GDP growth in the model to help them identify one
permanent shock (which can be thought of as technological change) by tracking permanent changes in
real GDP growth rates across business cycles. Benati
and Lubik also incorporate insights from the simple
search-and-matching model to identify two other
types of shocks, those that move the unemployment
rate and the job-vacancy rate in the same direction
and those that move the two variables in opposite
directions.8
In the search-and-matching model, an expected increase in production (driven either by higher productivity or anticipation of greater sales) requires a firm
to hire more workers. The firm posts more vacancies,
and these open positions eventually are filled by job
seekers, many of them previously unemployed. So
the rise in vacancy postings goes hand in hand with

Figure 3: Evolution of the Beveridge Curve by Business Cycle
11

10
Q1 1953 - Q2 1957
Q3 1957 - Q1 1960
Q2 1960 - Q3 1969
Q4 1969 - Q3 1973
Q4 1973 - Q4 1979
Q1 1980 - Q2 1990
Q3 1990 - Q4 2000
Q1 2001 - Q3 2007
Q4 2007 - Q4 2011

Job-Vacancy Rate (Percent)

3
2

6
7
8
Unemployment Rate (Percent)

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a decline in unemployment. This mechanism underlies the negative slope of the Beveridge curve and
allows Benati and Lubik to identify a cyclical shock
that causes the two variables to move in opposite
directions. The other type of shock can be identified
by observing that improvements in the matching
process—better job-search assistance, for example—
lead to a decline in unemployment and a reduction
in vacancy postings. With improved match efficiency,
firms need to post fewer vacancies in order to hire a
target number of workers.
Extraordinary Times
The slope of the Beveridge curve changes somewhat during each business cycle from the early
1950s through 2011. (See Figure 3.) At the bottom
of several cycles—including the Volcker disinflation
(1979–83)—the curve hooks outward, as it did following the recession of 2007–09. Then the curve circles
back toward its previous position. Blanchard and
Diamond referred to this pattern as a “counterclockwise loop,” but frequently the curve does not quite
close the counterclockwise loop. In other words, it
shifts outward. The curve loops clockwise (inward) at
the top of some business cycles, regaining signficant
ground from 1986 through 1989 and again from 1995
through 1999. Even so, the counterclockwise loop at
the bottom of cycles is the predominant pattern that
has persistently moved the curve outward since the
1950s toward a higher unemployment rate at any
given job-vacancy rate.
Benati and Lubik use several statistical techniques to
summarize and analyze the information from their
model. One of these techniques measures the degree
to which the two variables correlate across different
business cycles. Another technique measures the
degree to which the two variables are driven by the
same shock or different shocks across business cycles.
Within the context of the model, these statistical
techniques help Benati and Lubik compare shifts in
the Beveridge curve caused by the one permanent
(technology) shock and the two temporary (cyclical)
shocks. They find that from the early 1950s through
2011, shifts in the Beveridge curve that were caused
by the model’s one permanent shock are significantly
greater than shifts caused by the model’s two tempo-

rary shocks. One interpretation of this finding is that
the persistently outward shifts of the Beveridge curve
have been driven primarily by skill mismatch due to
technological change.
Benati and Lubik’s analysis suggests that there may
be one or two exceptions to this general trend, but
the large outward hook following the recession of
2007–09 is not one of them. The clearest exception
may have occurred during the Volcker disinflation
(1979–83), when Benati and Lubik’s analysis indicates
that the unemployment rate and the job-vacancy rate
were driven by one factor rather than some combination of technological and cyclical shocks. Their model
cannot identify monetary policy as that single driving
force because monetary policy does not enter into
the model in any way. But it is reasonable to assume
that the Federal Reserve’s contractionary policy under
the leadership of then-Chairman Paul Volcker was
strong enough to crowd out all other factors at the
time.9 By this same logic, another possible exception
to technology’s dominant role may have occurred
during the Great Inflation of the 1970s.
Policy Implications
Analyzing the evolution of the Beveridge curve by
business cycle seems to yield useful information
about the types of shocks that have influenced the
unemployment rate and the job-vacancy rate over
the past six decades.
At first glance, the severe outward hook at the bottom of the Beveridge curve following the recession of
2007–09 appears to indicate that extraordinary forces
were driving the labor market. But Benati and Lubik’s
model lends support to the idea that this hook was
caused primarily by skill mismatch due to technological change, the same factor that has been pushing
the Beveridge curve to the right since the 1950s.
The truly exceptional outward shift in the Beveridge
curve may have occurred during the Volcker disinflation—a time when the Federal Reserve intentionally
used monetary policy as a disruptive force to quell
inflation. In sharp contrast to the powerful results
of monetary policy during the Volcker disinflation,
Benati and Lubik’s analysis may suggest that the

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extraordinary monetary policy response to the recession of 2007–09 has done little to reduce the unemployment rate.
Thomas A. Lubik is group vice president for macroeconomics and financial economics, and Karl Rhodes
is editorial process manager in the Research Department at the Federal Reserve Bank of Richmond.
Endnotes
1

See Dow, J.C.R., and L.A. Dicks-Mireaux, “The Excess Demand
for Labour: A Study of Conditions in Great Britain, 1946–56,”
Oxford Economic Papers, New Series, February 1958, vol. 10,
no. 1, pp. 1–33.

The connection to William Henry Beveridge was made in
Green, Jerry, “On the Theory of Effective Demand,” Economic
Journal, June 1980, vol. 90, no. 358, p. 345.

See Blanchard, Olivier Jean, and Peter Diamond, “The Beveridge Curve,” Brookings Papers on Economic Activity, 1989,
no. 1, pp. 1–76.

For a concise summary of this research, see Hobijn, Bart, and
Ayşegül Şahin, “Beveridge Curve Shifts across Countries since
the Great Recession,” IMF Economic Review, December 2013,
vol. 61, No. 4, pp. 566–600.

To find more Reserve Bank perspectives on this debate, see
Barlevy, Gadi, “Evaluating the Role of Labor Market Mismatch
in Rising Unemployment,” Federal Reserve Bank of Chicago
Economic Perspectives, Third Quarter 2011, vol. 35, pp. 82–96;
and Federal Reserve Bank of Richmond Our Perspective
Series, “Labor Market Conditions and Policy,” last updated
on June 9, 2014.

For more details about this novel approach, see Benati, Luca,
and Thomas A. Lubik, “The Time-Varying Beveridge Curve,”
Federal Reserve Bank of Richmond Working Paper No. 13-12,
August 2013. This paper was subsequently published as a
chapter in Advances in Non-Linear Economic Modeling:
Theory and Applications, edited by Frauke Schleer-van
Gellecom, Berlin: Springer-Verlag, 2014, pp. 167–204.

The Conference Board Help-Wanted Index measures the number of help-wanted advertisements in 51 major U.S. newspapers. Barnichon built a measure of vacancy postings from 1951
through 2009 based on both print and online help-wanted
advertising. For more detail, see Barnichon, Régis, “Building a
Composite Help-Wanted Index,” Economics Letters, December
2010, vol. 109, no. 3, pp. 175–178.

The specific model comes from Lubik, Thomas A., “The Shifting
and Twisting Beveridge Curve: An Aggregate Perspective,”
Federal Reserve Bank of Richmond Working Paper No. 13-16,
October 2013. Benati and Lubik organize the interpretation of
their empirical findings around the predictions of the model
described in Shimer, Robert, “The Cyclical Behavior of Equilibrium Unemployment and Vacancies,” American Economic Review,
March 2005, vol. 95, no. 1, pp. 25-49.

For more on the dominant role of monetary policy during the
Volcker disinflation, see “The Only Game in Town” in Volcker:
The Triumph of Persistence by William L. Silber, New York:
Bloomsbury Press, 2012. Also see, “Disinflation” in A History of
the Federal Reserve, Volume 2, Book 2, 1970–1986 by Allan H.
Meltzer, Chicago: University of Chicago Press, 2009.

This article may be photocopied or reprinted in its
entirety. Please credit the authors, source, and the
Federal Reserve Bank of Richmond, and include the
italicized statement below.
Views expressed in this article are those of the authors
and not necessarily those of the Federal Reserve Bank
of Richmond or the Federal Reserve System.

FEDERAL RESERVE BANK
OF RICHMOND
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Full text of Economic Brief : Putting the Beveridge Curve Back to Work, No. 14-09

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