Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/340779 
Year of Publication: 
2021
Citation: 
[Journal:] Journal of Public Economics Plus [ISSN:] 2666-5514 [Volume:] 2 [Article No.:] 100009 [Year:] 2021 [Pages:] 1-17
Publisher: 
Elsevier, Amsterdam
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.
Subjects: 
Beveridge curve
Efficient unemployment rate
Unemployment gap
Business cycles
Sufficient statistics
JEL: 
E24
E32
E6
J63
J64
J68
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by-nc-nd Logo
Document Type: 
Article

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