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To the articleA Flow-Accounting Model of the Labor Market: An Application to Israel
Yossi Yakhin and Natalya Presman
- The analysis presented in the study shows that in the last decade, structural factors acted to lower the unemployment rate in the economy and explained at least half of the decline in the unemployment rate during this period.
- An assessment of the link between unemployment and job vacancies in Israel (the Beveridge curve) shows that over the business cycle, an increase of one percent in the number of unemployed is accompanied by an average decline of 3 percent in the number of job vacancies. Prolonged deviations from this link indicate a possible change in the economy’s structural unemployment rate.
The collection of points outlining the link between unemployment and job vacancies over the business cycle is referred to in the economic literature as the Beveridge curve. The joint variance of these variables can indicate whether the change is caused by cyclical factors or by structural factors. During economic boom periods, the demand for workers increases, new positions are opened, and unemployment declines. Therefore, the business cycles in the economy are reflected by the change in the opposing directions of unemployment and job vacancies. Research shows that the Beveridge curve incline in Israel is -3, meaning that during the business cycle, an increase of one percent in the number of unemployed is accompanied by an average decline of 3 percent in the number of job vacancies.
Alongside the effect of the business cycles, the concurrent and prolonged existence of unemployment alongside job vacancies indicates frictional unemployment which reflects the level of difficulty in finding compatibility between vacancies and workers. Structural changes in the labor market, such as stricter conditions for receiving unemployment benefits, an increase in the level of education of the labor force, or streamlining the operations of placement companies, reduce the friction and lower both unemployment and the number of job vacancies. Such changes are reflected in a shift in the Beveridge curve itself.
The study finds that in the past decade, there was a shift in the Beveridge curve in Israel, which was reflected in a concurrent decline in the number of job vacancies and in the number of unemployed. This decline reflects a structural change in the compatibility between workers and employers, and in the supply of work. It also explains at least half of the decline in the unemployment rate between 2004 and 2011; the remainder of the decline was the result of the economy’s transition from recession in 2004 to boom in 2011.
Figure 1 shows the unemployment rate in the economy and the rate of job vacancies from 1998 to 2011. The Figure shows that during economic lows (in red), the unemployment rate and the rate of job vacancies moved mostly on the declining side of the Beveridge curve, and that during economic boom periods (in blue), they moved in the opposite direction. The structural effect is reflected in an inward (leftward) shift of the Beveridge curve. The negative correlation between the variables is prominent in the Figure, mainly from 2001 onwards—the cyclical effect—and the inward shift of the curve is prominent at the end of the last decade—the structural effect. The statistical analysis presented in the study shows that the Beveridge curve started shifting inwards at least since 2004, long before the change in the raw data became noticeable with the turning point in the business cycle in 2008.
