Working Paper: NBER ID: w30211
Authors: Pascal Michaillat; Emmanuel Saez
Abstract: Most governments are mandated to maintain their economies at full employment. We propose that the best marker of full employment is the efficient unemployment rate, u*. We define u* as the unemployment rate that minimizes the nonproductive use of labor—both jobseeking and recruiting. The nonproductive use of labor is well measured by the number of jobseekers and vacancies, u + v. Through the Beveridge curve, the number of vacancies is inversely related to the number of jobseekers. With such symmetry, the labor market is efficient when there are as many jobseekers as vacancies (u = v), too tight when there are more vacancies than jobseekers (v > u), and too slack when there are more jobseekers than vacancies (u > v). Accordingly, the efficient unemployment rate is the geometric average of the unemployment and vacancy rates: u* = √uv. We compute u* for the United States between 1930 and 2022. We find for instance that the US labor market has been over full employment (u < u*) since May 2021.
Keywords: Labor Market; Unemployment Rate; Full Employment; Beveridge Curve
JEL Codes: E24; E32; E52; E61; J63; J64
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| efficient unemployment rate (u) (J64) | nonproductive labor use (J29) |
| u = v (C29) | labor market efficiency (J48) |
| v > u (D46) | labor market inefficiency (tight) (J46) |
| u > v (C29) | labor market inefficiency (slack) (J46) |
| u = sqrt(u * v) (C29) | efficient unemployment rate (u) (J64) |
| labor market conditions (J29) | efficient unemployment rate (u) (J64) |
| historical data (1930-2022) (Y10) | efficient unemployment rate (u) (J64) |