Assessing the Beveridge Curve in the 2008 Financial Crisis

Beveridge Curve Comments

I apply Beveridge Curve analysis to analyse impact of the 2008 Financial Crisis on employment before and after the collapse of Lehman Brothers. I compare and contrasts the immediate impacts and subsequent recoveries across the UK and US. Foremostly, this essay recognises that the statistical form of UK data within the analysis has been subjected to a smoothed seasonal average which theoretically allows more clarity in determining “underlying trends” and “significant changes in direction” within data (Federal Reserve Bank Dallas, 2021). The data used which excludes agriculture, forestry and fishing potentially also fails “to match common criteria” and “difference in coverages” when compared to USA data (Elsby, 2015). However, this short essay argues the length of the period under analysis and the intended base evaluation of fluctuations in aggregate demand and structural changes through Beveridge Curves, allows for differences between averaged data to be negated. Thus, this essay linearly explains the Beveridge Curve positions within the US and UK at the start, middle and end of the period.

Initial Beveridge Curve

In the beginning, the UK and USA are at high points on the Beveridge curves, with high vacancies and low employment.  However, the UK’s Beveridge Curve is closer to the origin than the US. This initial Beveridge Curve position arguably resulted from Thatcherite labour market policies and “institutional structural reforms” which had shifted labour market incentives to employment through “tax reductions”, “tougher unemployment support” and dissolution of  “public sector monopolies” (Pissarides, 2013). These policies allowed for higher UK matching efficiency while increasing competition and the opportunity cost of unemployment that consequently shifts WS-PS curves outwards towards higher rates of equilibrium employment.

Separation rate (constant)= matching efficiency m (unemployment rate decreases, vacancy rate increases)

Beveridge Curve at Median

The median period Beveridge Curves shows unemployment conditions in both the UK and the US following the collapse of Lehman Brothers reflected a fall into recession. Low vacancies and high unemployment show that the flow match theory is held within both economies. Job destruction took place with little matching occurring. However, while the UK showed a movement down the Beveridge Curve, the US economy reflected a shift outwards. This arguably results from macroeconomic flexibility within the US through successfully utilising money creation policies such as quantitative easing, enough to offset financial austerity and create jobs. However, a potential explanation of the microeconomic rigidity and untaken jobs in the USA but not the UK is the housing market collapse, which impeded US labour mobility and weakened matching efficiency. The Beveridge Curve’s shifts reflect that within this period, the US experienced “macroeconomic flexibility and microeconomic rigidity” (Pissarides, 2013).

The UK’s movement down the Beveridge Curve, however, signified that the aforementioned structural reforms successfully circumvented structural unemployment within this period. However, this essay highlights the UK’s stagnancy on the Beveridge Curve as a consequence of Thatcherite policy reliance on private-sector job creation and trickle-down economics that were stifled by weakened aggregate demand. Thus, within this period, there was minimal job creation within the UK. The Beveridge Curve indicated “microeconomic rigidity and macroeconomic flexibility”.  (Pissarides, 2013). 

Beveridge Curve at the end of Period  

Analysis of the Beveridge Curve concerning flow match theory allows us to understand the unemployment conditions within the two countries at the time. The final position of the US-UK Beveridge curves within this analysis highlights the different paths to recovery undertaken by both nations. The US moved from A->B->C whereby the financial recession initially led to greater unemployment as other structural weaknesses were exposed but eventually slowly moved up the Beveridge curve. The UK saw a smaller movement towards the right as well.

The extent and length of this financial recession are reflected within Beveridge Curves as even at the period’s end, both economies had yet to recover back to their initial positions. Per Pissadires, this correlates with other historical examples of recession e.g. the Great Depression where recovery movements back up the Beveridge curve, A->B->A only took place over many years. Further possible understandings of this come through Dosi’s (2018)  theory of “super-hysteresis” and its effect on the flow matching model whereby spillover effects from structural reforms within recession result in reduced “average level of worker skills” and more “turbulent net entry of firms into the market” following recessions. This can be seen within the UK’s Beveridge Curve as unemployment continued to rise despite the country moving towards recovery following the collapse of Lehman Brothers.