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The Beveridge Curve


Olivier J. Blanchard


International Monetary Fund (IMF); National Bureau of Economic Research (NBER)

Peter A. Diamond


Massachusetts Institute of Technology (MIT) - Department of Economics; National Bureau of Economic Research (NBER); CESifo (Center for Economic Studies and Ifo Institute)

May 1990

NBER Working Paper No. R1405

Abstract:     
Over the past thirty years, macroeconomists thinking about aggregate labor market dynamics have organized their thought around two relations, the Phillips curve and the Beveridge curve. The Beveridge curve, the relation between unemployment and vacancies, has very much played second fiddle. We think that emphasis is wrong. The Beveridge relation comes conceptually first and contains essential information about the functioning of the labor market and the shocks that affect it.

Labor markets in the United States are characterized by huge gross flows. Close to seven million workers move either into or out of employment every month. While that movement could be consistent with workers reallocating themselves across a given set of jobs, recent evidence by Steve Davis and John Haltiwanger suggests that these flows are associated with high rates of job creating and job destruction. Using a measure of job turnover, defined as the sum of employment increases in new or expanding establishments and employment decreases in shrinking or dying establishments, Davis and Haltiwanger find that during 1979-83, a period of shrinking employment, job turnover in manufacturing averaged some 10 percent per quarter. From a macroeconomic viewpoint, the labor market is highly effective in matching workers and jobs, yet those flows are so large that they imply the coexistence of unfilled jobs and unemployed workers. 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. In this paper, we first develop a conceptual frame in which to think about gross flows, about the matching process, and about the effects of shocks on unemployment and vacancies. We then turn to the empirical evidence, using data for the postwar United States. We focus first on the matching process, estimating the "matching function," the aggregate relation between unemployment, vacancies, and new hires. We then interpret the Beveridge relation. More precisely, we look at the joint behavior of unemployment, employment, and vacancies, and infer from it the sources and the dynamic effects of the shocks that have affected the labor market over the past 35 years.

Number of Pages in PDF File: 63

JEL Classification: 13, 82

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Date posted: July 5, 2004  

Suggested Citation

Blanchard, Olivier J. and Diamond, Peter A., The Beveridge Curve (May 1990). NBER Working Paper No. R1405. Available at SSRN: http://ssrn.com/abstract=227492

Contact Information

Olivier J. Blanchard (Contact Author)
International Monetary Fund (IMF) ( email )
700 19th Street, N.W.
Washington, DC 20431
United States
202 623 7825 (Phone)
202 623 7271 (Fax)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Peter A. Diamond
Massachusetts Institute of Technology (MIT) - Department of Economics ( email )
50 Memorial Drive
Room E52-344
Cambridge, MA 02142
United States
617-253-3363 (Phone)
617-253-7804 (Fax)
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
617-253-3363 (Phone)
617-253-7804 (Fax)
CESifo (Center for Economic Studies and Ifo Institute) ( email )
Poschinger Str. 5
Munich, DE-81679
Germany
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