Historically, the US unemployment rate has increased when the vacancy rate fell. This time will likely be the same.

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

July 26, 2022

The US labor market is tight as unemployment remains very low (3.6 percent in Q2 2022) and job vacancies are exceptionally high (7 percent). The Federal Reserve intends to slow down activity to ease inflation. Officials believe it can be done by decreasing vacancies without triggering a rise in unemployment, but historically this has been extremely rare.

Since the 1950s, every time the vacancy rate came down from a quarterly peak, it was accompanied by a significant rise in unemployment. After the Q1 2007 peak, for example, the unemployment rate increased by as much as 3.8 percentage points. On average, the unemployment rate rose by 2.1 percentage points during the two years following a vacancy rate peak.   

The US labor market has behaved extremely unusually since the onset of the pandemic. But the Federal Reserve's notion of quieting the labor market without inducing the pain of unemployment flies in the face of historical evidence. There have been no free lunches when it comes to curbing inflation, and there is no reason to expect one today. 

This PIIE Chart is based on Olivier Blanchard, Alex Domash, and Lawrence Summers' Policy Brief, Bad News for the Fed from the Beveridge Space. Produced and designed by Nia Kitchin and Oliver Ward.

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