Another Labor Market Graph

Here's another useful graph for understanding the current state of the labor market. It's known as the Beveridge Curve, which graphs the relationship between job vacancies and the unemployment rate. With no changes in the efficiency of a labor market, a given level of openings should correspond with a given unemployment rate. For example, 2005 and 2006 in the graph below have roughly the same number of vacancies and similar unemployment rates.

There has been a noticeable shift in the curve, indicating a less efficient labor market. In the 2000s labor market, the rate of vacancies we have today would correspond with an unemployment rate of around 5.5 to 6%. 

Many reasons are given for the shift. The housing crisis has reduced the mobility of labor, in part because people's debts are tied to a physical location and it became difficult and/or unattractive to sell a house and move. Additionally, the housing bubble supported jobs that would only return if the bubble returns, making it harder for people who were in those jobs to find new work. The longer people are unemployed the more their skills (human capital) deteriorate. And it is taken as a given that there is a skills mismatch in the United States between the unemployed and job vacancies. And the United States invests less money than most developed countries in worker re-training. Some economists have pointed to government welfare programs that, for the unmarried poor at least, reduce the cost of unemployment and increase real tax rates on income gained from working. 

These trends suggest that the recovery is more complete than one might think, in that our unused economic potential is lower than it was previously. In the short run our growth potential is probably (there’s still a lot of debate about it) lower than it was before, and unemployment is likely to remain a bit above what we’re used to. This concern is apparent in Fed policy. The Fed has stated that it will only use monetary stimulus until unemployment is below 6.5%, indicating that it thinks monetary stimulus will only increase inflation, and not decrease unemployment beyond that point.