Dallas Fed, Report: Job vacancy, unemployment relationship clouds ‘soft landing’ prospects

“The Federal Reserve has significantly tightened monetary policy over the past year, raising concerns that a higher unemployment rate will follow. Some economists have argued that because the job vacancy rate has been well above its pre-pandemic level, there is plenty of room for vacancies to fall before the unemployment rate must rise. This would allow the Fed to achieve a soft landing and avoid a recession.”

“Our results suggest that a soft landing is less likely than previous articles have indicated because gross substitutability between vacancies and unemployment makes the Beveridge curve flatter—a larger change in the unemployment rate for a given change in the vacancy rate.”

“However, changes in matching efficiency could complicate what is observed over the next year. During the pandemic, matching efficiency likely fell due the reallocation of workers across industries.”

“If matching efficiency returns to its pre-pandemic level, it would shift the Beveridge curve left and lead to a smaller increase in the unemployment rate than Table 1 shows. In this case, reductions in demand that shift the economy along the Beveridge curve are offset by improvements in matching efficiency.”