Can job vacancies fall without an increase in unemployment?
By: Alex Domash¹ and Lawrence H. Summers²
Despite recent hikes in the fed funds rate, the U.S. labor market continues to be extraordinarily tight. In April, the job openings rate remained elevated at 7.0 percent, workers continued to quit at a historic rate of 2.9 percent, and wage growth sustained its rapid pace well above 6 percent (according to the Atlanta Wage Tracker). The consensus view among the Fed and other economists is that the labor market is unsustainably hot.
In recent remarks, the Fed has pushed a new theory on how to cool the labor market and slow down wages while still achieving a soft landing of the economy. Essentially, the Fed leadership believes it can curb demand in such a way that job openings fall considerably, without a corresponding increase in unemployment. Consider the following statements:
“There’s a path by which we would be able to have demand moderate in the labor market and therefore have vacancies come down without unemployment going up.” Fed Chair Jerome Powell, FOMC Press Conference, 4 May 2022
“The vacancy rate can be reduced substantially, from the current level to the January 2019 level, while still leaving the level of vacancies consistent with a strong labor market and with a low level of unemployment, such as we had in 2019.” Fed Governor Christopher Waller, Speech at the IMFS, 30 May 2022
“We’ve got twice as many job openings as unemployed. In those circumstances historically, businesses have brought down hiring and reduced openings rather than necessarily laid off workers,” Fed Vice-Chair Lael Brainard, CNBC Interview, 2 June 2022
To examine the plausibility of the Fed’s claims, we look at the historical relationship between job vacancies and unemployment going back to the 1950s, and analyze the trajectory of unemployment after vacancies come down from a peak. We find that there has never been a historical example where the job vacancy rate came down in a substantial way without a significant increase in unemployment. On the contrary, we show that reducing vacancies by 20 percent requires, on average, a 3-percentage point increase in the unemployment rate.
Historically, the job vacancy rate and the unemployment rate are strongly negatively correlated: an increase in vacancies corresponds to a decrease in unemployment, and a decrease in vacancies corresponds to an increase in unemployment. This relationship, known as the Beveridge curve, is plotted in Figure 1 using data from the Job Openings and Labor Turnover Survey (JOLTS) going back to 2001. Notably, since the outset of the pandemic, job vacancies have surged to a record high and deviated significantly from their historical relationship with the unemployment rate — leading to the outward shift in the Beveridge curve shown in orange.
Last week, Fed Governor Waller argued that the most plausible path forward was a movement in vacancies and unemployment from current levels to January 2019 levels (when vacancies were last at a peak). We depict this path with the red arrow in Figure 1. This near vertical drop would require the vacancy rate to fall from 7.2 percent to 4.6 percent — a 35 percent decrease — with very little movement in the unemployment rate.
To assess whether it’s credible that vacancies can fall so significantly without a subsequent increase in unemployment, we extend the JOLTS vacancy series back to the 1950s using data constructed by Barnichon (2010), who makes use of the Help-Wanted Index published by the Conference Board to create a vacancy rate series from 1951 to 2000. Using this historical vacancy series, combined with the JOLTS vacancy data from 2001 to present, we are able to analyze movements in the Beveridge curve for the U.S. economy from 1951 to present.
Figure 2 plots separately each vacancy rate peak plus and minus eight quarters to visualize the movement in the unemployment rate after each previous peak in vacancies in the postwar period. The eight quarters before a peak are shown in blue and the eight quarters after a peak are shown in orange. Contrary to the Fed’s claim that vacancies can come down without unemployment going up, the figure shows that in every historical example, the unemployment rate has risen substantially in the eight quarters after the vacancy rate reaches its maximum.
Table 1 presents further evidence showing that the vacancy rate has never come down in a significant way without large increases in unemployment. For each of the previous nine vacancy rate peaks, we calculate the increase in unemployment that follows from a substantial fall in the vacancy rate. To be conservative in our estimate, we look at a 20 percent decline in vacancies, which would bring the vacancy rate down from its March 2022 peak of 7.2 percent to a still extremely elevated level of 5.8 percent.
Our results show that every time after the vacancy rate falls by 20 percent from its peak, the unemployment rate increases substantially. On average, a 20 percent decline in vacancies requires a 3-percentage point increase in the unemployment rate. The smallest increase in unemployment associated with a 20 percent drop in vacancies in the postwar period was 1.5 percentage points. The largest increase occurred in the mid 1970s, when unemployment rose by more than 5 percentage points.
It’s important to note that a 20 percent decline in the vacancy rate from its March 2022 high of 7.2 percent would still only bring vacancies down to 5.8 percent. For perspective, the highest pre-pandemic vacancy rate was 5.2 percent (which occurred in 1979 and would require a 28 percent drop in vacancies), and the 50-year historical average pre-pandemic was 3.4 percent (which would require a more than 50 percent drop in vacancies). The Fed has recently suggested that the January 2019 vacancy rate of 4.6 percent is a plausible target — which would require a 35 percent drop in the vacancy rate.
The historical evidence thus suggests that a significant drop in the vacancy rate back to historically reasonable levels is unlikely without an increase in unemployment. Even if the Fed can reduce vacancies somewhat without a rise in unemployment, it’s highly plausible that we would continue to see inflationary pressure from the labor market. In a recent paper, we have argued that the job vacancy rate and the quits rate are both highly significant for wage inflation (Domash and Summers 2022), and both remain extraordinarily elevated compared to their historical averages. There is little reason to believe that a marginal drop in vacancies will be sufficient to cool the labor market.
Our findings indicate that bringing down job openings without increases in unemployment is at odds with both economic theory and the empirical evidence. Based on historical experience, the Fed’s new labor market hope for a soft landing seems to be a very difficult outcome to achieve.
References
Barnichon, R. (2010). Building a composite help-wanted index. Economics Letters, 109(3), 175-178.
Brainard, Lael (2022). Transcript of Vice Chair Lael Brainard Interview on CNBC, 2 June.
Diamond, P. A., & Şahin, A. (2015). Shifts in the Beveridge curve. Research in Economics, 69(1), 18–25.
Domash, Alex & Summers, L. H. (2022). A labor market view on the risks of a U.S. hard landing (No. w29910). National Bureau of Economic Research.
Domash, Alex & Summers, L. H. (2022). The relation between nominal and real wage growth. Medium Blog Post. 11 April. https://medium.com/@alex.domash/the-relation-between-nominal-and-real-wage-growth-2bfd2e1b27b8
Powell, J H (2022). Transcript of Chair Powell’s Press Conference, 4 May. https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20220504.pdf
Waller, Christopher J. (2022). Responding to High Inflation, with Some Thoughts on a Soft Landing. Speech at the Institute for Monetary and Financial Stability (IMFS) Distinguished Lecture, Goethe University Frankfurt, Germany. 30 May. https://www.federalreserve.gov/newsevents/speech/waller20220530a.htm
[1] Alex Domash is a Research Fellow in the Mossavar-Rahmani Center for Business & Government at the Harvard Kennedy School. He is recent graduate of the Masters in Public Administration in International Development (MPA/ID) program at the Harvard Kennedy School. Twitter: @asdomash
[2] Lawrence Summers is the Charles W. Eliot University Professor and President Emeritus at Harvard University. He served as the 71st Secretary of the Treasury for President Clinton and the Director of the National Economic Council for President Obama. Twitter: @LHSummers
