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246 Unemployment and Monetary Policy in the European Union
in Europe such employment was cut off as a result of minimum wages and was
instead reflected in unemployment. That could account for the higher growth in
U.S. employment and also for the smaller growth in real wages and productivity.
So qualitatively it provides an explanation of the facts different from mine,
but also different from the conventional view, in that the differential behavior is
not the result of strong unions but instead of the economic effects of minimum
wages. But it is questionable whether the minimum wage provision could account
for much of the differential behavior of employment and unemployment since
the 1970s, for, as pointed out in the CEPR reports, it is neither a new institution
nor one specific to Europe (though it has been quantitatively more important
there.)
Be this as it may, it would be hopeless to try to measure how much, if any,
each of the supposed supply effects contributed to the rise in unemployment. I
propose instead to rely on a rather different construct known as the Beveridge
curve. I will demonstrate how this device can be used to measure the total number
of job openings in the economy and to estimate to what extent variations in unemployment
can be traced back to changes in jobs (demand effects) and to other
causes (supply effects).
3 Tests of the Role of Demand Based on Beveridge Curve Tests
3.1 The Beveridge Curve
The Beveridge curve can be derived from two basic hypotheses. The first is that
all unemployment is basically frictional—that is, due to the fact that when people
become unemployed, some time is required before they can find another vacant
and suitable job. Given a steady flow of people into unemployment, F (measured
say, as people per month), then if the average time it takes for an unemployed to
find a job is T months, the average amount of unemployment, say U, will amount
to T-months flow, U = FT. By expressing U and F as a percentage of the labor
force, this can be rewritten as u = fT.
The second hypothesis is that T depends on the existing vacancies rate, v. If
there are but few, it will take a long search to find one. We may thus hypothesize
that T is roughly inversely proportional to v, say T = c/v where c is some
constant. But that implies u = fc/v or uv = fc, which is a standard way of formulating
the Beveridge curve.
Figure 8.2 shows a hypothetical Beveridge curve for a given country and point
of time. It is a “rectangular hyperbola” in the (U, V) space and its position depends
on the two parameters f and c that characterize that economy. If, and only if, these
parameters change in time, the curve will shift. The actual value of U and V at