The Beveridge curve in Europe: new evidence using national and regional data

The Beveridge curve depicts the empirical negative relationship between job vacancy rate and unemployment rate, and reflects the efficiency of the job matching process. Movements along a fixed downward sloping Beveridge curve are associated with cyclical shocks, while shifts of the curve arise from structural factors that alter the matching efficiency between job vacancies and unemployed workers. National and regional data on job vacancies and unemployment are combined to estimate the Beveridge curves of five European countries and their regions, focusing on the period 1975 to 2004. I also analyse whether shifts in European Beveridge curves are due to changes in the composition of the unemployed pool, labour market rigidities or cyclical and structural shocks. The empirical evidence suggests that changes in labour market rigidities, long term unemployment, as well as cyclical shocks are responsible for outward shifts in European Beveridge curves. I also find evidence of nonlinearities in the relation between unemployment and labour market institutions.     

MODELLING A REGIME‐SHIFTING BEVERIDGE CURVE

This paper offers new insights into Beveridge curve analysis by modelling the unemployment–vacancy rate relationship within a Markov regime‐switching environment in which the probabilities of curve‐shifting are determined endogenously by shift factors. Shift factors include structural factors such as labour market participation and net migration, while cyclical variables include GDP growth, the real rate of interest, and labour productivity. This approach enables us to estimate regime‐specific parameters and to assess the role played by these factors in influencing the transition probabilities of switching between regimes. Using New Zealand data, we show that increases in the participation rate have shifted the Beveridge curve inward, while increases in net migration have shifted the curve outward.     

A benchmark for wage growth through the lens of the Beveridge curve

Using an estimated Beveridge curve, we trace out the vacancy–unemployment ratio in the steady state. This steady-state measure for labour market tightness is embedded in a VAR framework to obtain a benchmark for wage growth reflecting a labour market equilibrium.     

Unemployment and deterioration of human capital

The paper deals with the deterioration of human capital during spells of unemployment. In our model the probability of leaving the unemployment pool decreases with the duration of unemployment. It can be shown that with a linear deterioration function and a simple distribution function for the reservation productivity of firms, unemployment duration is suitably described by a distribution of the Gompertz-Makeham type. In a numerical simulation it could be demonstrated that deterioration of human capital during unemployment affects the relation between vacancies and unemployment in a specific way: in the case of labour market slackness the steady-state Beveridge curve bends away markedly from the standard u-v-curve in an outward direction while in a situation of almost full employment the effects are negligible. For higher deterioration parameters the Beveridge curve may even be upward sloping in a situation of excess supply on the labour market, implying the existence of multiple equilibria. Empirical estimation of the distribution function with German labour market data 1984–1987 reveals that the multiple equilibrium case is likely to be relevant in reality.For valuable comments and suggestions I am grateful to W.Franz, A.Hamerle and an anonymous referee. Responsibility for remaining errors remains with the author.     

UNDERSTANDING LABOUR MARKET FRICTIONS: AN ASSET PRICING APPROACH

Labour market friction is viewed in terms of the market value of an employed worker as opposed to the position of the Beveridge curve. This market value of an installed worker, which I call Tobin's  Q  of a worker, is inversely proportional to the average quality of the match between employers and workers. Based on this measure, I find that the labour market friction rises during a period of productivity boom. This phenomenon is indirectly supported by the data where it is found that the relative value of a worker with respect to tangible capital shows a positive association with the total factor productivity. The model suggests that firms may be compromising the quality of a skill match during a period of tight labour market conditions.     

Unemployment–inflation trade-offs in OECD countries

Inflation and unemployment reduce welfare of individuals and should be as low as possible in any economy. Cointegration and Granger causality tests suggest that there are long run relations between these two variables among the OECD economies. While rates of unemployment vary significantly among these economies, rates of inflation have stabilised at lower rates as a result of inflation targeting policies adopted in them during the last two decades. The Phillips curve phenomena are still empirically significant for 28 out of 35 of these OECD economies in country specific regressions; in fixed and random effect panel data models and in a panel VAR model for 1990:1 to 2014:4. Country specific supply curves and Okun curves are consistent to thin Phillips curve relations. Leftward shifts in the Beveridge and Phillips curves require labour market reforms balancing between job creations and destructions. Complementing macro stimulations by microeconomic structural and institutional reforms can bring efficiency in bargaining for wages and employment among firms and workers to make unemployment–inflation trade-offs more significant and relevant in these economies.     

The Unemployment-Vacancy Relationship in Australia

One of the most important features of the Australian economy in the past two decades has been the structural deterioration of labour market performance, reflected in both an increase in the average rate of unemployment and an outward shift in the Beveridge Curve, which depicts the relationship between unemployment and vacancies. This article attempts to uncover some of the causes for this structural deterioration, in terms of the factors affecting the UVrelationship. We find that the Beveridge Curve shifted out around 1974, consistent with an increase in the equilibrium rate of unemployment which is generally agreed to have occurred around that time. Using gross labour market flow data, we also investigate the determinants of the equilibrium Beveridge Curve in the 1980s. We find that the Beveridge Curve shifted further outwards in the 1980s. The most important determinant of this shift was the decline in the search effectiveness of the unemployed, reflected in the increasing incidence of long-term unemployment. Partially offsetting this influence during this time were the declining labour force participation of men, and the very large increases in female employment.     

The Displacement Effect of Labour‐Market Programs: MONASH Analysis*

A key question concerning labour‐market programs is the extent to which they generate jobs for their target group at the expense of others. This effect is measured by displacement percentages. We describe a version of the MONASH model designed to quantify the effects of labour‐market programs. Our simulation results suggest that: (i) labour‐market programs can generate significant long‐run increases in employment; (ii) displacement percentages depend on how a labour‐market program affects the income trade‐off faced by target and non‐target groups between work and non‐work; and (iii) displacement percentages are larger in the short run than in the long run.     

The Beveridge curve and labour market dynamics in Turkey

This article investigates the dynamics of unemployment and vacancy rates in Turkey during the period 1951 to 2008 by means of a Beveridge Curve (BC). The time-series analysis of unemployment and vacancies as well as two other relevant labour market variables, real wages and real labour productivity, strongly suggests inefficiency in the Turkish labour market. A stable long-run relationship between unemployment rate and vacancy rate is found for Turkey, that is, the existence of a negatively sloped BC is verified. The estimated Turkish BC reflects the structural problems and lack of flexibility in the labour market. The modified BC with real wages and labour productivity reveals that labour productivity has no significant effect on unemployment rate whereas wages have positive and significant effects on the same variable.     

Labour market reform and the macroeconomic efficiency of the labour market in Australia

This paper assesses the effects of a decade and a half of labourmarket reform in Australia on labour market flexibility at themacroeconomic level. Increased labour market flexibility isinterpreted as reduced structural unemployment and enhancedefficiency of matching. We use shifts in the Beveridge Curveas a measure of changes in labour market efficiency (followingSolow, R., What is labour-market flexibility? What is it goodfor?, Keynes Lecture, British Academy, London, December, 1997).Time series analysis of unemployment, vacancies and other relevantvariables strongly suggests that changes in the efficiency oflabour market matching over the period reflect the cyclicaleffects of hysteresis rather than the effects of labour marketreform.     

Continuity and Change: Labour Market Programs and Education Expenditure

Since 1971 Australian governments have varied expenditure on labour market programs and education. This article attempts to explain these changes in the context of several straightforward hypotheses concerned with political processes. In both policy areas the evidence is generally consistent with four views: that ALP governments spend relatively more than coalition governments; that ALP expenditure is more likely to be directed to the public sector, and coalition expenditure to the private sector; that governments of both political persuasions tend to move towards their opponents' position in budgets immediately preceding elections; and that, after the marked changes initiated in the 1972 to 1974 period, the parties have become increasingly similar in expenditure terms. Apparently there have been important differences between the political parties in government, but these distinctions have become less clear–cut over recent years.     

How Segmented are Skilled and Unskilled Labour Markets: the Case of Beveridge Curves

This paper tests whether there is evidence that two distinct Beveridge curves for the skilled and unskilled aggregate markets exist. The results support the hypothesis and specifically find that the unskilled labour segment is less efficient at matching workers with jobs, primarily due to higher labour turnover rates. Higher turnover rates can be indicative of a poor match between employers' and jobseekers' expectations. The results also indicate that other shift variables, such as the replacement rate, the incidence of long-term unemployment, the immigration rate and the market circumstances in the skilled segment were only important for the unskilled segment.     

Duration-Specific Unemployment Outflow Rates and Labour Market Programs

A matching function approach is used to investigate the macroeconomic effects of labour market program (LMP) commencements on unemployment outflows in Australia using unpublished data that classify commencements and outflows by duration of unemployment. The results indicate that LMPs have had significant effects on outflows from long-term unemployment. However, the net impact of programs on these outflows suggests that the substitution and displacement effects associated with programs are high. These results are consistent with recent microeconomic research into the effects of LMP participation on individual transitions out of unemployment.     

The making of Beveridge's Unemployment (1909): three concepts blended

The aim of this paper is to re-examine William Henry Beveridge's (1879?–?1963) early ideas on unemployment. After developing through three phases (‘from the unemployable to the unemployed’, ‘from the unemployed to unemployment’, and ‘perfection of the labour market’), Beveridge finally accomplished a coherent package of remedies for unemployment: labour exchanges with National Insurance on the basis of the living wage principle (previously unexplored but evident through his work). These three concepts, perfectly blended, formed his original and unique standpoint. By analysing this development of ideas, we can position Beveridge's doctrine of unemployment more appropriately in the history of economic thought.     

Displacement Effects of Active Labour Market Policy: The Youth Labour Market in Finland

In 1994 the number of workers participating in active labour market programmes in Finland was 299,000. On average there where 125,000 workers in these programmes at any one time, the average length of participation in a programme being about 5 months. In relation to the 2.5 million-strong Finnish labour force, these figures are proportionally large. In 1994 the total expenditure on unemployment amounted to 6.7 per cent of GNP of which the share spent on active labour market programmes was about 25 per cent. The study investigates the displacement effects of active labour market programmes in the youth labour market in Finland. The two age groups analysed are 15-19-year-olds and 20-24-year-olds. The results, based on a VAR analysis of quarterly data from the period 1981.1-1995.2, suggest that the displacement effects of job-creation programmes may be substantial. The study cannot, however, provide any robust estimates of the likely size of such displacement effects on youth employment in Finland. This revised version was published online in July 2006 with corrections to the Cover Date.     

The Effectiveness and Efficiency of Active Labour Market Policies in Poland

Following the predominance of macroeconomic stabilisation policies and passive income support schemes in the first phase of transition, active labour market policies (ALMPs) have now come to play a more important role in transition economies. This paper looks at the Polish experience and provides empirical evidence on the effectiveness of ALMPs. We use the Polish Labour Force Survey of August 1994 in combination with its Supplement on the Evaluation of Labour Market Policies together with data on ALMP expenditure at the regional (voivodship) level. The macroeconometric analysis of the relationship between labour market flows and ALMP expenditure shows no significant effects. The microeconometric analysis reveals that ALMPs are not particularly well targeted at the problem groups in the labour market. That is, women and people with basic vocational education do not receive enough attention. As to the effectiveness of ALMPs, the paper shows that former participants cannot expect to find employment more easily than their peers who have been unemployed but have not been in a programme. Subjective evaluations of former participants also suggest that ALMPs, but especially works programmes, have not improved their chances to find a job. This revised version was published online in July 2006 with corrections to the Cover Date.     

Microeconomic Evaluations of Australian Labour Market Programs

This article reviews literature which measures the effects of labour market programs on individual's labour market outcomes.     

Sector-specific productivity shocks in a matching model

Endogenous separation matching models have the shortcoming that they are barely able to replicate the Beveridge curve (i.e. the negative correlation between unemployment and vacancies) and business cycle statistics jointly. This paper builds upon the sectoral shock literature and combines its insights with the standard endogenous separation matching approach. We show that the endogenous matching model with sectoral shocks can generate an aggregate Beveridge curve and performs reasonably well in explaining business cycle facts, especially compared to the one-sector baseline model.     

Institutions,capital stock and wage setting in Spain

This article confronts two distinct perspectives of the labour market: the institutionalist view?–?highlighting equilibrium and labour market institutions?–?and the Chain Reaction Theory?–?emphasizing dynamics and the growth drivers’ role in labour market performance. We consider the ratio of public to private capital stock as a growth driver relevant to the labour market; provide different economic rationales for this ratio to exert a negative influence in wage setting; and explore its empirical relevance in the context of a wage setting curve for Spain comprising the standard variables. There are two main results. First, several institutional variables taken to be critical to explain unemployment in the mainstream literature are not relevant for the Spanish wage setting curve. Second, there is a negative and significant influence of the ratio of public to private capital stock, which is robust to different specifications of the wage setting equation.     

WILL ELECTRIC UTILITIES COMPETE EFFECTIVELY WITHOUT A PROFIT MOTIVE?

This paper reviews the factors leading to the decline of utility participation in the energy conservation market over the past decade in California. The analysis finds that California's regulatory focus on mandating conservation program funding levels, rather than on measuring and rewarding the achievement of energy savings from utility conservation programs, has contributed to a decline in both program scope and program effectiveness. Other major reasons for this decline include potential revenue losses resulting from conservation programs on the generation side, a preoccupation with identifying winners and losers using benefit-cost tests, and a regulatory focus on "system" impacts from conservation programs that precluded a more direct marketing focus on utility customers' values and needs. The paper concludes that both regulators and utilities should work to develop new indicators of success in the conservation market. These should focus on achieving energy conservation results and rewarding the results with increased profits as opposed to rewarding just effort with expense recovery.