Chart of the Week: Are US labour markets healing?

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The COVID-induced rigidities in the US labour market are easing, but the labour market remains extremely tight, implying potential upwards pressure on inflation from wages.

The Beveridge curve shows the relationship between job vacancies and unemployment. When jobs are plentiful (i.e. when vacancies are high) unemployment tends to be low (i.e. workers are scarce), and labour markets are said to be tight. In this world, wage inflation tends to be higher. When vacancies are low, unemployment tends to be high, and the labour market is said to be operating with spare capacity: in these circumstances, the upward pressure on wages is limited. The curve therefore tends to have a downward slope.

The COVID-19 pandemic led to an unprecedented shake-up in US labour markets with the whole Beveridge curve shifting to the right. This implies (all else equal) that the US was experiencing a higher level of unemployment for any given level of vacancies. That shift reflects an increase in labour market ‘rigidities’, probably, in this case, caused by a mismatch between the type and/or location of vacancies that have arisen and the labour force available to fill those opportunities: a laid-off barista in a coffee shop in Detroit cannot readily take up a position as a software engineer in San Francisco, for example. The greater the labour market mismatch, the higher the structural rate of unemployment, and the greater the potential impact on inflation arising from running the economy hot.

The risk that this structural deterioration in the labour market might persist was highlighted as one of the main sources of upside risk to the inflation outlook in Fathom Consulting’s previous Global Economic and Market Outlook, released in September. Fortunately, that risk appears to be fading, with the Beveridge curve beginning to shift back to the left as government support schemes are reduced. This is not only true in the US (shown in the chart) but elsewhere too, including in the UK (once the impact of the furlough scheme is taken into account). So, it looks as though the structural unemployment rate may not have increased: but the labour market remains extremely tight nevertheless.

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