Standard measures of Unemployment make U.S. labor market looks a bit too tight

Researchers and policymakers alike have been confounded in recent years regarding how to interpret what available data are saying about the tightness of the labor market. Observers and analysts long have turned to the unemployment rate. However, search and matching models of the labor market imply that unemployment may not tell the whole story about labor market tightness.

This Brookings conference paper written by Faculty Associate Katharine Abraham and John Haltiwanger from the University of Maryland Department of Economics, part of Brookings Paper on Economic Activity (BPEA), proposes a generalized measure of labor market tightness that addresses the limitations of the standard measures. Specifically, the paper employs accounts both for variation in the number of effective job searchers, drawn not only from the unemployed but also from those currently out of the labor force or already working, and for variation in the intensity with which employers seek to fill their jobs.

Results suggest using the generalized measure of labor market tightness based on the ratio of effective vacancies to effective searchers, the U.S. labor market was considerably less tight at the end of 2019 than implied by the standard ratio of vacancies to unemployment. The differing behavior of the two measures reflects the fact that the standard tightness measure does not account for important variation in search behavior on the part of both firms and workers.

In the end, the paper argues that the generalized measure of labor market tightness should be preferred conceptually to the standard measure, as the generalized measure of labor market tightness dramatically outperforms the standard measure via the lens of the matching function for hires. Specifically, the predicted job-filling rate (hires per vacancy) using the generalized measure tracks the actual job-filling rate much more closely than the job-filling rate predicted using the standard measure of labor market tightness. In addition, the generalized measure also outperforms the standard measure in predicting the job-finding rate among the unemployed.

Reference:

How Tight Is U.S. Labor Market?

Brookings Paper on Economic Activity (BPEA) Conference Draft, published online on March 19th, 2020

See the complete conference paper

Published on Thu, 04/24/2025 - 10:47