What can 40 years of data on vacancy advertising costs tell us about labour market equilibrium?

Michal Stelmach, James Kensett and Philip Schnattinger

Economists frequently use the vacancies to unemployment (V/U) ratio to measure labour market tightness. Analysis of the labour market during the current inflationary period often assumes the V/U ratio is constant and compares this measure with a supposed pre-2019 equilibrium. However, the V/U ratio has trended upwards over recent decades. We explore the impact of changing vacancy posting costs on equilibrium labour market tightness through the lens of two models: an empirical error-correction model; and a simple structural ‘search and matching’ model. We find that the raw V/U ratio can be misleading for conclusions about labour market tightness. We outline an improved measure – the VU gap – which indicates that the UK labour market returned to a broadly balanced position in 2024 H2.

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How have recent changes to the demand for workers affected the unemployment rate?

Tomas Key

During the recovery from the Covid pandemic, the demand for workers rose to unprecedented levels in the UK. The number of jobs that firms were looking to fill increased to 1.3 million in the middle of 2022, 60% higher than the level in the last three months of 2019. The amount of job vacancies has fallen substantially over the past year, but remains at a high level. This post discusses how those changes to the demand for workers have affected the unemployment rate. In particular, it outlines how an equilibrium model of the labour market can help to explain why there appears to have been a change to the relationship between job vacancies and unemployment in recent years.

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Finding a Match

Bradley Speigner.

Is falling unemployment masking a broader deterioration in UK labour market performance? The ease with which a typical job seeker lands a job is a crucial indicator of the health of the labour market, which cannot be fully inferred from just a casual glance at the headline unemployment rate. It is true that unemployment has declined quite rapidly recently. But this is because job openings have been unusually abundant while the labour market’s capacity to match individual workers to available jobs quickly has actually worsened. This capacity is referred to as matching efficiency, and it started falling in the UK even before the 2008 recession.

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