Does The Fed Track The Beveridge Curve?

We don’t know the answer to this question, but here at Cumberland Advisors we track the Beveridge Curve every month. It plots the relationship between the job openings rate and the unemployment rate. According to the Bureau of Labor Statistics, “The economy’s position on the downward sloping Beveridge Curve reflects the state of the business cycle.” The Beveridge Curve is useful in determining the efficiency of the labor market.

The job openings rate is plotted on the vertical axis and the unemployment rate is plotted on the horizontal axis. Typically, there is an inverse relationship between the job openings rate and the unemployment rate which causes the B-curve to move either upward and to the left or downward and to the right. When the unemployment rate increases and the job openings rate decreases, the curve moves downward and to the right.

This represents a movement of the curve in a recessionary direction. When the unemployment rate decreases and the job openings rate increases, the curve moves upward and to the left, signifying a movement of the curve in an expansionary direction. When the curve moves upward and to the right, this signifies a mismatch between the types of jobs that are available and the skills or location of job seekers.

We construct the Beveridge Curve using three different unemployment rates: the U-3, U-6, and married men with spouses present. We use the U-3 (Chart 1) because it is used by the BLS as the “official unemployment rate” of the United States. It includes people who are currently available for work and have actively searched for employment in the past four weeks.

We also construct a Beveridge Curve using the U-6 (Chart 2), because we think it is the broadest measure of unemployment. We believe it is a better reflection of the current state of unemployment in the U.S. because it includes people who are marginally attached to the labor force. According to the BLS, “The marginally attached are divided into those not currently looking because they believe that their search would be futile- so-called discouraged workers- and those not looking for other reasons such as family responsibilities, ill health, or lack of transportation.”

These are people who would like to be employed but are no longer searching for work because they have become discouraged by their lack of training, skills, or experience. People who would prefer to work full-time but are only able to find part-time positions are also included in the U-6.

In addition to constructing Beveridge Curves using the U-3 and U-6, we also use the unemployment rate of married men with spouses present (Chart 3). According to Jason Benderly of Applied Global Macro Research, this rate is a consistent long-term series that tells us whether there is labor cost pressure from tightness in the labor force.

We use December 2000 as the start date for the Beveridge Curves because that is when JOLTS was first published. The JOLTS survey, published by the Bureau of Labor Statistics, is our source for the job openings rate. The BLS publishes JOLTS with a two-month lag, so our most recent data point is from June 2012.

We have divided the Beveridge Curve into five segments. Each segment is color-coded and marks the beginning of a new business cycle. From July 2009 to April 2012, the curve suggested economic recovery as it moved upward and to the left. Recently, the curve has been moving in an unusual direction. From April 2012 to June 2012, the curve continued to move upward, suggesting economic recovery. However, in June 2012, each of our three curves moved in a different direction, sending a mixed message.

The B-Curve constructed with the U-3 remained the same in June as in May because of a lack of change in the U-3 unemployment rate. The increase in the U-6 unemployment rate caused the B-Curve constructed with the U-6 to shift in a recessionary direction. On the other hand, the B-Curve constructed with the unemployment rate for married men with spouses present moved in the opposite direction as a result of a decrease in this measure of unemployment.

The upward movement of the curves between April and June 2012 was due to an increase in the job openings rate between April and June. There were 3.8 million job openings in June, but the increase in job openings still has not had a positive impact on the unemployment rate. The unemployment rates of the U-3, U-6, and married men with spouses present suggest that although more jobs are being created, there is a mismatch between the types of positions that were available and the skills or location of the people seeking employment.

A study conducted by John Silvia at Wells Fargo Securities on August 9, 2012 shows that the majority of the job openings occurred in the professional and business sectors. The slowest growth took place in government and construction sectors. The employees that work in sectors with fewer job opening, such as the building construction sector, may lack the skills necessary to transition to a sector with more available positions.

The job openings rate for July has not been published yet, but the increase in the unemployment rates of the U-3, U-6, and married men with spouses present between June and July suggests that this trend will continue next month as well. Will this trend continue for the rest of the year? Or will we see improvement in the unemployment rates as job openings continue to rise? We will find out as we continue to track the shifts in the B-Curve each month.