Germany’s Beveridge Curve

Today’s blog post is all about the so-called Beveridge curve. It describes the negative empirical relationship between the unemployment rate and the job vacancy rate. It can be used to gauge the state of the labour market and generally indicates where an economy is in the economic cycle (Bleakley and Fuhrer, 1997). In recessionary times, the economy moves towards the lower right corner due to an increase in unemployment and a reduction in vacancies. In expansionary times, the economy moves towards the upper left corner due to a natural fall in unemployment and an increase in vacancies posted by companies (figure 1). The position of the Beveridge curve itself is dynamic over time. It can shift out- or inward due to changes in factors like matching efficiency. An example would be the implementation of effective training programmes by the government which reduce the skills mismatch between the readily available labour and the job openings in the country. Such policies would tackle structural unemployment, shifting the Beveridge curve to the left (figure 1).

beveridge-curve-1
Figure 1 – The Stylised Beveridge Curve (Own work)

While figure 1 represents a stylised Beveridge curve, one can obtain actual data from the OECD, Eurostat or other national databases to estimate the curve empirically. I plotted the empirical Beveridge curve for Germany over the period from 2006 to 2016 in figure 2. First, the job vacancy rate can be obtained from Eurostat and is represented on the y axis. To be more exact, it is the vacancy rate for industry, construction and services (except activities of households as employers and extra-territorial organisations and bodies). The unemployment rate can be obtained from the Deutsche Bundesbank and is represented on the x axis. They have seasonally adjusted unemployment data readily available but I used the quarterly unadjusted unemployment rate because the vacancy rate quoted in Eurostat is likewise unadjusted. Also, in order to distinguish between the different states of the economic cycle, I divided the empirical Beveridge curve into the expansionary and recessionary periods in the Euro area as defined by CEPR (2016). Since 2006 there have been two major downturns, namely the global financial crisis and the European debt crisis:

Start End Euro Area
1993Q4 2008Q1 Expansion
2008Q2 2009Q2 Recession (Global Financial Crisis)
2009Q3 2011Q3 Expansion
2011Q4 2013Q1 Recession (European Debt Crisis)
2013Q2 today Expansion

Having described my methodology, let’s look at the diagram in detail. First, we can compare the state of the labour market in the first quarter of 2006 with the second quarter of 2016 and it becomes obvious that the German economy has moved along its Beveridge curve from a low vacancy/ high unemployment state to a high vacancy/ low unemployment state over the last decade. In the second quarter of 2016, the job vacancy rate quoted by Eurostat was at 2.4 percent while unemployment was at a historic low of 6 percent in comparison to unemployment rates in the years before.

beveridge-curve-2
Figure 2 – Germany’s Beveridge Curve (Data source: Deutsche Bundesbank, 2016; Eurostat, 2016)

Second, we can look at the Euro area expansionary and recessionary periods sequentially and examine potential changes in the German labour market. In the run-up to the global financial crisis (dark blue section), we can see a significant movement along the curve to the left, indicating major improvements in the German labour market. Over the financial crisis itself (green section), we observe a significant temporary dislocation of the Beveridge curve in the first two quarters due to a reduction in the job vacancy rate. However, the vacancy rate jumped back up in the third quarter of the recession followed by an increase in the unemployment rate of 1.2 percent from the last quarter of 2008 to the first quarter of 2009. The subsequent expansionary period (grey section) has overall led to further increases in the vacancy rate and reductions in unemployment despite considerable temporary jumps. More recently, however, the German economy has appeared unimpressed by the weak European macroeconomic outlook (blue and orange section) and its labour market recovered quickly from the increase in unemployment of around 1 percent over the course of the European debt crisis at the end of 2012. Since the second quarter of 2013, its job vacancy/ unemployment rates cluster in the upper left corner, signalling a strong labour market and a relative resilient national economy compared to the rest of Europe. Lastly, one could argue that, according to the data, Germany has not experienced major permanent shifts in its Beveridge curve over the last decade but rather movements along the curve. This stands in contrast with economies like the US where economists debate over a permanent outward shift in the Beveridge curve over the global financial crisis with higher structural unemployment rates for a given job vacancy rate post-recession (Zumbrun, 2014).

So that’s me for today; my post looked at the Beveridge curve both theoretically and empirically for the case of Germany. I hope you enjoyed my work and many thanks for reading!

Jasse


References

Bleakley, H., and Fuhrer, J.C. (1997). Shifts in the Beveridge Curve, Job Matching, and Labor Market Dynamics. New England Economic Review, Sept./Oct. 1997, p.3-19.

CEPR (2016). Euro Area Business Cycle Dating Committee. Available at: http://cepr.org/content/euro-area-business-cycle-dating-committee [Accessed 01 November 2016]

Deutsche Bundesbank (2016). Time series BBDL1.Q.DE.N.UNE.UBA000.A0000.A01.D00.0.R00.A: Unemployment registered pursuant to section 16 Social Security Code III / Germany / Social Security Code III and Social Security Code II / Rate / Unadjusted figure. Available at: https://www.bundesbank.de/Navigation/EN/Statistics/Time_series_databases/Macro_economic_time_series/its_details_value_node.html?https=1&tsId=BBDL1.Q.DE.N.UNE.UBA000.A0000.A01.D00.0.R00.A [Accessed 01 November 2016]

Eurostat (2016). Job Vacancies Database. Available at: http://ec.europa.eu/eurostat/web/labour-market/job-vacancies/database [Accessed 01 November 2016]

Zumbrun, J. (2014). Peter Diamond Thinks the Beveridge Curve Might Not Tell Us Much of Anything. The Wall Street Journal Online. Available at: http://blogs.wsj.com/economics/2014/08/26/peter-diamond-thinks-the-beveridge-curve-might-not-tell-us-much-of-anything/ [Accessed 01 November 2016]

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