The Evolution of Labour Market Equilibrium: A 40-Year Analysis of Vacancy Advertising Costs
As economists, Michal Stelmach, James Kensett, and Philip Snowtinger delve into the intricate world of labour market dynamics, they highlight the importance of the vacancies to unemployment (V/U) ratio in measuring labour market tightness. In the current economic landscape, assumptions about equilibrium are often based on a constant V/U ratio, compared to pre-2019 levels. However, a closer look reveals a consistent uptrend in the V/U ratio over the past few decades, challenging traditional views. This prompts an exploration of how changing vacancy posting costs influence equilibrium labour market tightness using two distinct models: an empirical error-correction model and a simplified structural ‘search and matching’ model. Through their analysis, they unveil the limitations of relying solely on the raw V/U ratio for assessing labour market tightness and propose a more refined metric, the VU gap, indicating a return to equilibrium in the UK labour market by the second half of 2024.
Reasons Behind the Rise in Vacancies:
Labour productivity growth: Enhanced productivity elevates job value, leading to increased job creation as the marginal product of labour rises.
Changes in matching efficiency: Improved efficiency incentivizes firms to post more vacancies due to higher chances of successful job fills.
Lower cost of vacancy advertising: Reduced advertising costs enable firms to post more vacancies for extended durations, potentially altering recruitment patterns and contributing to an increase in vacancies while easing recruitment intensity.
The Shift in Vacancy Advertising Costs:
The dramatic shift in advertising spending on recruitment over the years, evident in Chart 2, reflects a transition from traditional print media to online job boards and social media platforms. Real unit costs per vacancy have plummeted by over 80% since 2000, primarily driven by the affordability of online advertising. This shift underscores a pivotal change in recruitment strategies, with online platforms offering cost-effective solutions that have reshaped the recruitment landscape significantly.
Estimating Equilibrium Vacancies and V/U:
By employing an error-correction model, the authors establish the equilibrium level of vacancies (V) using real vacancy cost and hourly labour productivity as key determinants. Combining these results with the equilibrium level of unemployment (U) paints a vivid picture of the V/U trajectory in alignment with observed trends, indicating a balanced labour market post-2018. The premise of a prolonged slack period post-global financial crisis (GFC) and marginal tightness in 2018-19 is further substantiated through this analysis, setting a benchmark for assessing contemporary labour market dynamics.
The Search and Matching Model Perspective:
Apart from the empirical error-correction model, an alternative approach grounded in the Diamond-Mortensen-Pissarides (DMP) model offers further insights into the impact of falling vacancy costs on the equilibrium. The calibrated model showcases a plausible scenario where reduced unit vacancy costs elevate job creation, leading to a higher V/U ratio without altering the Beveridge curve, aligning well with UK data patterns.
Understanding Labour Market Slack:
The introduction of the VU gap as a more reliable indicator of labour market tightness steers the evaluation away from conventional metrics like the V/U ratio and the vacancy rate. While advertising costs influence vacancy equilibrium, the analysis suggests that equilibrium levels have not strayed significantly from 2019 levels. As per the model estimates, a closed or marginally negative VU gap in 2024 Q3 underscores a balanced UK labour market scenario, with supporting evidence from alternative labour demand measures.
In conclusion, the meticulous examination of 40 years of vacancy advertising data provides valuable insights into the evolving landscape of labour market equilibrium. As Stelmach, Kensett, and Snowtinger shed light on the intricacies of equilibrium estimation, their findings paint a nuanced picture of labour market dynamics, deftly balancing theoretical constructs with empirical evidence.
For more compelling insights and discussions on economic trends, reach out to Michal Stelmach and James Kensett from the Bank’s Current Economic Conditions Division, or Philip Snowtinger from the Bank’s Structural Economics Division. You can connect with them via email at [email protected]. Join the conversation, challenge prevailing orthodoxies, and delve deeper into the realm of economic analysis with Bank Underground.
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