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The euro area labour market through the lens of the Beveridge curve

Agostino Consolo and António Dias Da Silva

Economic Bulletin Articles, 2019, vol. 4

Abstract: In this article we look at the euro area labour market using the framework underlying the Beveridge curve, which captures the negative relationship between the unemployment rate and the job vacancy rate. The Beveridge curve shows that, at a given moment in time, there are jobs vacant and people unemployed, while the shape and the position of the curve provide important information about the functioning of the labour market. There are two key concepts associated with the Beveridge curve: labour market tightness and matching efficiency. Labour market tightness is the number of vacant posts per each unemployed person and matching efficiency reflects the market’s ability to match individuals to jobs. We analyse the importance of these two concepts for wage developments using a simple version of the search and matching model, where unemployment, wages and vacancies are jointly determined and the Beveridge curve features prominently. First, we derive two aggregate measures that encapsulate the changes in the vacancy -unemployment space: labour market tightness and matching efficiency. Second, we look at the information content behind market tightness and job matching efficiency to analyse the euro area labour market and its cyclical conditions. Third, aggregate measures of labour market tightness and efficiency are used in a standard wage Phillips curve equation to measure their marginal impact. The results support the view that labour market tightness and labour market efficiency both play a role in explaining wage developments. However, the quantitative implications for wages differ only marginally from those of the standard Phillips curve approach. Overall, labour market efficiency provides an important qualitative margin of labour market functioning that is not captured in standard wage Phillips curve specifications. JEL Classification: E24, J63, J64

Keywords: Beveridge curve; job flows; labour market efficiency; labour market tightness; wages (search for similar items in EconPapers)
Date: 2019-06
Note: 3572376
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Handle: RePEc:ecb:ecbart:2019:0004:1