Brookings Papers on Economic Activity

ABSTRACT:

We construct a generalized measure of labor market tightness based on the ratio of vacancies to effective searchers. Our generalized measure exhibits substantially less volatility than the standard measure defined as the ratio of vacancies to unemployment. Effective searchers include not only the unemployed but also those who are out of the labor force and the employed. These groups account for a substantial share of hires and their presence mutes the effects of the pronounced countercyclical movements in unemployment. The effective searcher measure also distinguishes different groups among the unemployed. During protracted contractions, the distribution of unemployment shifts toward the long-term unemployed, a group with lower relative search intensities, contributing to the smaller proportional increase in effective searchers as compared to the simple unemployment count. The Beveridge curve constructed using effective searchers is much more stable than the standard Beveridge curve. Further, the matching function for hires based on our generalized measure outperforms the matching function based on the ratio of vacancies to unemployment. Our approach thus reduces the unexplained residual variation required in the matching function to be consistent with real world data.