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272 Unemployment and Monetary Policy in the European Union
and resulting in unemployment u(A) and vacancies v(A). Suppose that at some
later point in time market conditions have shifted to a new point D, given by the
intersection of the new constraint C(D) and a different Beveridge curve k¢ with
unemployment increased to u(D). In this section of table 8.4 and figure 8.3, we
have decomposed u(D) into two components: the first is u(B), at the intersection
of the initial Beveridge curve with the new constraint, which is shifted to the left
because of the large decrease in the number of jobs as a percent of the labor force
(in the graph the decline is from 102% down to 96 percent); the second component
is u(D) - u(B) and measures the effect of the shift in the Beveridge curve
from k to k¢,with the constraint kept fixed at the new level, C(D). This shift adds
to unemployment as must happen if and only if, the curve shifts in an outward
direction. As noted in the text (p. 246), in table 8.2 this second component is
given by the difference between u (which corresponds to u(D) in the figure) and
u* (which corresponds to u(B)).
For present purposes it is more relevant to concentrate on the increase in unemployment.
Which in our figure is represented by u(D) - u(A). Following the
approach in the text, this increase can be decomposed into two components: i)
u(B) - u(A) which measures the pure effect of the decline in jobs and vacancies
reflected in the upward shift of the constraint from C(A) to C(D) with a fixed
Beveridge curve, namely the initial one (i.e. k); and ii) u(D) - u(B) which, as
before, measures the effect of the shift of the Beveridge curve from k to k¢, with
the constraint fixed at C(D). But it can be readily seen from the figure that there
is an alternative possible decomposition, by moving form A to C and from C to
D. In this decomposition u(C) - u(A) provides an alternative measure of the effect
of the shift of the Beveridge curve, but with the constraint kept unchanged at the
initial position. Then u(D) - u(C) measures the pure effect of the shrinkage of
jobs, but with the Beveridge curve fixed at the new level, k¢. An interesting question
is whether either of the alternative and equally consistent ways of measuring
the jobs and shift effect will systematically yield a higher estimate of, say,
the jobs effect. It is seen that, in the specific case illustrated in figure 8.3, the
results demonstrate that the Beveridge shift effects u(D) - u(B) and u(C) - u(A)
are relatively small and not very different from each other, though the alternative
calculation seems to produce a slightly larger result (and hence a smaller measure
of the job effect). But in reality one cannot give a definite answer to the question,
as can be verified from the year by year calculation for Germany reported
in table 8.4.
In table 8.4, column (1) reports the change in unemployment (positive if there
is an increase, negative if there is a decrease) relative to the benchmark year,
which is 1960 for Germany, and corresponds to point A in the figure. The second
column reports the job effect on the basis of the original approach, i.e. u(B) -