Working Paper: NBER ID: w26474
Authors: Pascal Michaillat; Emmanuel Saez
Abstract: This paper develops a sufficient-statistic formula for the unemployment gap-the difference between the actual unemployment rate and the efficient unemployment rate. While lowering unemployment puts more people into work, it forces firms to post more vacancies and to 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: elasticity of the Beveridge curve, social cost of unemployment, and cost of recruiting. Applying this formula to the United States, 1951-2019, we find that the efficient unemployment rate averages 4.3%, always remains between 3.0% and 5.4%, 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 slumps. The US labor market is therefore generally inefficient and especially inefficiently slack in slumps. In turn, the unemployment gap is a crucial statistic to design labor-market and macroeconomic policies.
Keywords: unemployment; Beveridge curve; labor market efficiency; sufficient statistics
JEL Codes: E24; E32; J63; J64
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| unemployment gap (J64) | labor market efficiency (J48) |
| unemployment gap (J64) | economic downturns (F44) |
| economic downturns (F44) | unemployment gap (J64) |
| Beveridge curve (J69) | unemployment gap (J64) |
| sufficient statistics (C46) | unemployment gap (J64) |
| social planner's problem (D71) | unemployment gap (J64) |