A pedestrian passes a "Help Wanted" sign in the door of a hardware store in Cambridge, Massachusetts, U.S., July 8, 2022.

Publication Type

Bad news for the Fed from the Beveridge space

Olivier Blanchard (PIIE), Alex Domash (Harvard University) and Lawrence H. Summers (Harvard University)

Policy Briefs 22-7
Photo Credit: REUTERS/Brian Snyder


The Federal Reserve seeks to cool an overheated US labor market to ease wage hikes and reduce job vacancies, without a painful spike in unemployment. But empirical evidence indicates that these goals have never been accomplished together and remain unlikely now. In fact, fighting inflation will require a reduction in job vacancies and also an increase in unemployment. The inverse relationship between job vacancies and unemployment is measured by the Beveridge curve, named after a British economist. Blanchard, Domash, and Summers find that the Fed’s hope that vacancies can be decreased without increasing unemployment flies in the face of historical empirical evidence. The current low unemployment rate and the very high vacancy-to-unemployment ratio suggest that the labor market is overheating and the natural unemployment rate has increased. It has increased about 1.3 percentage points from its pre-COVID level, implying the labor market is even more overheated than suggested by the current unemployment rate.

Data Disclosure:

The data underlying this analysis can be downloaded here [zip].

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