A Quick Look At Unemployment

July 21, 2011

(This article was first published on The Dancing Economist, and kindly contributed to R-bloggers)

Labor market tightness is defined as the vacancies or job openings rate divided by the unemployment rate.  The theory goes that as job openings increase relative to the unemployment rate a tightness is created in that workers get the upper hand in wage bargaining power. Of course the opposite is also true- that is when job opening’s are low relative to the pool of unemployed- then we face a situation where employers hold the bargaining power.

A current look at labor market tightness at below 30% reveals that the labor market is healing at a staggeringly disappointing pace. Given the recent jump in the unemployment rate and the slight increase we’ve had in labor market tightness, one can reasonably argue that the unemployment rate increased do to structural factors.

This is because the relationship between vacancies and the unemployment rate – called the Beveridge Curve is a representation of Labor Supply and frictional mismatch among other things, and Labor Market Tightness is sometimes referred to as determining the slope of a Labor Demand curve.  So as Labor demand has slightly picked up since the dark days of the recession and the unemployment rate has still increased- labor supply or mismatch must be playing a dominant role.  I have not looked into the specifics of the Employment Situation so i don’t know what exactly is going on, but i would say that it probably has to do with previously discouraged workers re-entering the labor force.  I really would have to peruse through JOLTS and The Employment Situation to fully diagnose the severity and causes into the recent spike in the unemployment rate.  Maybe when i’m not feeling so darn lazy.

keep dancin’

Steven J.

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