Beveridgean Unemployment Gap
25 Pages Posted: 3 May 2021 Last revised: 7 Oct 2021
Date Written: November 2019
This paper proposes a new method to estimate the unemployment gap (the actual unemployment rate minus the efficient rate). While lowering unemployment puts more people into work, it forces firms to post more vacancies and devote more resources to recruiting. This unemployment-vacancy tradeoff, governed by the Beveridge curve, determines the efficient unemployment rate. Accordingly, the unemployment gap can be measured from three sufficient statistics: the elasticity of the Beveridge curve, cost of recruiting, and social cost of unemployment. In the United States the unemployment gap is countercyclical, reaching 1.5--6.5 percentage points in slumps. Thus the US labor market appears inefficient---especially inefficiently slack in slumps.
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