Beveridge curves

Here’s the basis of someone like Larry Summers’s key worry.

Thanks to the pandemic, the decline in job matching efficiency has shifted the so-called Beveridge curve. Here’s the time series of unemployment and job vacancies.

And then the important bit, flipping them into a scatterplot so you can eyeball the relationship.

To move 2 points lower on the Y-axis, you almost certainly don’t have to move 9 points off the x-axis.

But, as a matter of empirical observation, you will surely have to move some, shift or no shift.

If workers are much pickier about the jobs they want or don’t match well with those out there, we would say the potential labour supply curve has shifted inwards.

This is yet another way of saying that the level of inflation associated with a given level of unemployment is higher. This is called the non-accelerating inflation rate of unemployment.

So, where does the inflation come from? Previously, monetary and fiscal policy was too stimulatory, thanks to the pandemic, at a time of limited production capability.

What about now, with monetary policy tightening and fiscal policy clearly contractionary? Well, it comes from this labour mismatch issue.

Anyway, that’s the thinking; that’s why Larry is in the “hard landing” scenario.

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