Bad news for the Fed from the Beveridge space

17 Pages Posted: 28 Jul 2022

See all articles by Olivier Blanchard

Olivier Blanchard

Peterson Institute for International Economics

Alex Domash

Harvard Kennedy School of Government

Lawrence H. Summers

Harvard University; National Bureau of Economic Research (NBER); Harvard University - Harvard Kennedy School (HKS)

Date Written: July 13, 2022

Abstract

The Federal Reserve seeks to cool an overheated US labor market to ease wage hikes and reduce job vacancies, without a painful spike in unemployment. But empirical evidence indicates that these goals have never been accomplished together and remain unlikely now. In fact, fighting inflation will require a reduction in job vacancies and also an increase in unemployment. The inverse relationship between job vacancies and unemployment is measured by the Beveridge curve, named after a British economist. Blanchard, Domash, and Summers find that the Fed’s hope that vacancies can be decreased without increasing unemployment flies in the face of historical empirical evidence. The current low unemployment rate and the very high vacancy-to-unemployment ratio suggest that the labor market is overheating and the natural unemployment rate has increased. It has increased about 1.3 percentage points from its pre-COVID level, implying the labor market is even more overheated than suggested by the current unemployment rate.

Keywords: United States, US Federal Reserve, inflation, labor

Suggested Citation

Blanchard, Olivier and Domash, Alex and Summers, Lawrence H., Bad news for the Fed from the Beveridge space (July 13, 2022). Peterson Institute for International Economics Policy Brief 22-7, Available at SSRN: https://ssrn.com/abstract=4174601 or http://dx.doi.org/10.2139/ssrn.4174601

Olivier Blanchard (Contact Author)

Peterson Institute for International Economics ( email )

1750 Massachusetts Avenue, NW
Washington, DC 20036
United States

Alex Domash

Harvard Kennedy School of Government ( email )

111 Western Avenue 10 soldiers Field park apartmen
Boston, MA 02163
United States

Lawrence H. Summers

Harvard University ( email )

1875 Cambridge Street
Cambridge, MA 02138
United States
617-495-1502 (Phone)
617-495-8550 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Harvard University - Harvard Kennedy School (HKS) ( email )

79 John F. Kennedy Street
Cambridge, MA 02138
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
543
Abstract Views
3,463
Rank
96,277
PlumX Metrics