Beveridgean Unemployment Gap
authors・Pascal Michaillat, Emmanuel Saez
abstract・This paper estimates the unemployment gap (the actual unemployment rate minus the efficient unemployment rate) using the sufficient-statistic approach from public economics. 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. This novel formula applies to a wide range of macroeconomic models of the labor market. We implement the formula using US data. We find that the efficient unemployment rate varies between 3.0% and 5.4% since 1951, and has been stable between 3.8% and 4.6% since 1990. As a result, the unemployment gap is countercyclical, reaching 6 percentage points in deep slumps. Thus the US labor market is inefficient—especially inefficiently slack in slumps. The unemployment gap is in turn a crucial statistic to determine optimal labor-market and macroeconomic policies.
figure 5・Unemployment gap in the United States, 1951–2019.