# The Beveridge Curve

The Beveridge curve, named after economist William Beveridge, was developed in the mid-twentieth century in order to depict the relationship between job vacancies and unemployment.

The Beveridge curve is drawn to the following specifications:

• The horizontal axis shows the unemployment rate (as typically defined).
• The vertical axis shows the job vacancy rate, which is the number of job vacancies as a proportion or percentage of the labor force. (In other words, the job vacancy rate is the number of empty jobs divided by the labor force and possibly multiplied by 100 percent, and the labor force is defined in the same way as it is in the unemployment rate.)

So what shape does the Beveridge curve typically take?

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## The Shape

In most cases, the Beveridge curve slopes downward and is bowed toward the origin, as shown in the diagram above. The logic for the downward slopes is that, when there are a lot of unfilled jobs, unemployment must be relatively low or otherwise the unemployed people would go work in the empty jobs. Similarly, it stands to reason that job openings must be low if unemployment is high.

This logic highlights the importance of looking at skills mismatches (a form of structural unemployment) when analyzing labor markets since skills mismatches prevent unemployed workers from taking open jobs.

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## Shifts of the Beveridge Curve

In fact, changes in the degree of skills mismatch and other factors that influence labor-market efficiency cause the Beveridge curve to shift over time. Shifts to the right of the Beveridge curve represent increasing inefficiency (i.e. decreasing efficiency) of labor markets, and shifts to the left represent efficiency increases. This makes intuitive sense, since shifts to the right result in scenarios with both higher job vacancy rates and higher unemployment rates than before- in other words, both more open jobs and more unemployed people- and this can only happen if some sort of new friction was introduced into the labor market. Conversely, shifts to the left, which make possible both lower job vacancy rates and lower unemployment rates, happen when labor markets function with less impediment.

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## Factors that Shift the Curve

There are a number of specific factors that shift the Beveridge curve, and some of them are described here.

• Frictional unemployment - When more unemployment arises because it takes time to find a job that is a good fit (i.e. frictional unemployment increases), the Beveridge curve shifts to the right. When the logistics of getting a new job get easier, frictional unemployment decreases and the Beveridge curve shifts to the left.
• Structural unemployment via skills mismatch- When the skills of the labor force don't match well with the skills that employers want, higher job vacancy rates and higher unemployment will exist at the same time, shifting the Beveridge curve to the right. When skills are better in line with labor market demands, both job vacancy rates and unemployment rates decrease, and the Beveridge curve shifts to the left.
• Economic uncertainty - when an economy's outlook is uncertain, firms will be hesitant to make the commitment to hire (even when a job is technically vacant), and the Beveridge curve will shift to the right. When employers feel more optimistic about future business prospects, they will be more willing to pull the trigger on hiring and the Beveridge curve will shift to the left.

Other factors thought to shift the Beveridge curve include changes in the prevalence of long-term unemployment and changes in the labor force participation rate. (In both cases, increases in the quantities correspond to shifts to the right and vice versa.) Note that all of the factors fall under the heading of things that affect the efficiency of labor markets.

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