Gauti Eggertsson is an Icelandic-born economist at Brown University who has a knack for describing interesting economic phenomena. He identified and named the “paradox of toil,” which says that there can be less work in the aggregate because everyone wants to work more.
Eggertsson has a new phrase, which he minted last month at the annual conclave of economists and central bankers in Jackson Hole, Wyo. It’s the “Beveridge threshold.” It’s no academic obscurity. If Eggertsson is right, the existence of the Beveridge threshold explains how inflation has fallen rapidly without much of a rise in unemployment — and why any further decline in inflation may not be as painless.
I asked Eggertsson last week about his latest coinage. “That was something I am quite proud of having introduced just now,” he said. “I’m hoping it will catch on because I think it’s a nice phrase.”
Eggertsson contributed the phrase to a paper with Pierpaolo Benigno of the University of Bern in Switzerland that he presented in Jackson Hole. According to their new framework, they wrote, the risk of a jump in unemployment at this stage is probably greater than the risk of a jump in inflation, “suggesting policy should ease going forward.” That accords with what Jerome Powell, the Fed chair, signaled is going to happen when the rate-setting Federal Open Market Committee meets later this month.
Eggertsson’s Beveridge threshold is named after William Henry Beveridge, a British economist and reformer who was born in 1879 in what today is Bangladesh and died in 1963 in Oxford. He advocated social insurance for Britons “from the cradle to the grave.” (Like many intellectuals of his era, he was also a eugenicist.)
Today Beveridge is best known, oddly enough, for something that’s not actually his: the Beveridge curve, which describes the inverse relationship between the unemployment rate and the job vacancy rate. It’s intuitive: When the labor market is tight and it’s easy to find a job, there are many job openings and a low unemployment rate. Vice versa for a loose labor market.
Although Beveridge wrote extensively about the relationship between vacancies and unemployment, he never drew the curve that’s named after him. And if “Beveridge threshold” catches on, that will be another phrase that Beveridge did not invent. Such are the vicissitudes of fame.
These three paragraphs are a little technical, but bear with me. You can state the Beveridge curve in numbers rather than rates: the number of vacant jobs compared to the number of people looking for work. The Beveridge threshold happens to be, according to Benigno and Eggertsson, roughly the point on the Beveridge curve where the numbers are equal: There is one open job for every unemployed worker. (That doesn’t mean finding work is a breeze — many of the jobs that are available will require skills that job-seekers don’t have, or will be in the wrong parts of the country, etc.) When vacancies go above this threshold, Benigno and Eggertsson wrote, the labor market becomes too tight and enters a “labor shortage” regime.
Benigno and Eggertsson analyzed 111 years of U.S. economic history, including six major surges in inflation. They found that in a tight labor market (more vacancies than job seekers), the vacancy rate tends to shoot up even when the jobless rate declines only a little. Also, it takes only a small increase in economic activity to produce a big burst in inflation. (In economists’ terms, the Phillips curve suddenly steepens.) In a loose labor market (more seekers than vacancies), it’s the opposite: It takes a big decline in economic activity to bring inflation down just a little.
What does this mean for non-economists? It explains what happened during and after the Covid recession, and possibly what’s in store. First, Covid wrecked the job market. As the economy bounced back from the shutdown, people were spending less than before the pandemic on certain kinds of things and much more on others. The people who were looking for work didn’t have the skills that employers needed — not to mention that there simply weren’t enough workers. The ratio of vacancies to unemployed, which had fallen during the shutdown, soared to the highest since World War II.
Many prominent economists, including Lawrence Summers of Harvard, predicted it would take years of punishingly high unemployment to bring inflation back down. But Powell hoped instead (along with Benigno, Eggertsson and others) that the economy would be able to achieve a soft landing, and that’s what happened. The labor market cooled off through a drop in vacancies more than through an increase in the number of unemployed. Problem (almost) solved!
There’s a long-running debate among economists as well as politicians about how much of the inflation surge during President Biden’s term was because of supply factors, such as Covid-related interruptions of supply chains, and how much was because of demand factors, such as pandemic assistance funds and pent-up desire to spend as restrictions eased. The authors put two-thirds of the blame on demand factors and write that furthermore, “demand must push the economy beyond the Beveridge threshold for supply shocks to have a meaningful effect.”
Eggertsson told me about a time that his family of five was turned away from a restaurant in Providence because it was “full” even though only a third of the tables were occupied: There weren’t enough staff members to cover the rest. That anecdote appears in the paper. Eggertsson said he thinks some economists shy away from the strong-demand explanation for inflation because it seems to blame the Democrats for being overly generous. “There is a strong grain of wanting to explain this by supply shocks,” he said.
The inflation surge is mostly behind us, but there are new risks now that the labor shortage is over. Benigno and Eggertsson calculate that there is a certain unemployment rate associated with their Beveridge threshold — the point at which the labor market stops being tight. Right now they estimate it at around 4.4 percent, which is just a hair above the actual 4.3 percent rate as of July. They suggest that this “Beveridge threshold unemployment rate” could become a useful metric for policymakers. If it does, you read it here first.
As for current monetary policy: If the economy gets softer from here and we’ve passed beyond the Beveridge threshold, the unemployment rate could rise considerably more than it has so far. They say it’s also possible — but less likely — that their calculations are wrong and the labor market is still fairly tight, making it more vulnerable to an inflation spike.
Between the two risks of high unemployment and high inflation, we’ve been focused for three years on the latter, and understandably so. But if Benigno and Eggertsson are right — and I think they are — it’s unemployment we should be more worried about now.
Elsewhere: Clothing Shoppers Are Dressing Down
Consumers are buying cheaper clothing, seemingly in response to high inflation, Bank of America Institute reported last month based on analysis of anonymized credit card data. Discount retail spending per household has been growing faster than overall retail spending since July 2022. “The market share for value apparel has increased nearly four percentage points for Gen Z and Millennials in the last year,” the institute said. The increase in the market share for cheaper clothing has been greater for lower- and middle-income consumers, it said.
Quote of the Day
“Did you know that quarterly hog and pig counts are a principal economic indicator? Yet, there is not a regular government report specifically dedicated to the gig economy. I am certainly glad we collect data for important agricultural commodities, but I think we should probably be examining the large and diverse gig economy as much as we do the pig economy.”
— Adriana Kugler, a governor of the Federal Reserve, in a speech to the National Association for Business Economics Foundation (July 16)
The post America’s Luck on Unemployment May Soon Run Out appeared first on New York Times.
