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, in any model with a Beveridge curve, the unemployment gap depends on three sufficient statistics: elasticity of the Beveridge curve, social cost of unemployment, and cost of recruiting. Applying this novel formula to the United States, 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 design labor-market and macroeconomic policies.
figure 6・Unemployment gap in the United States, 1951–2019.