From the perspective of the fill rate (Figure 1b) as opposed to the Beveridge Curve (Figure 1a), the labour market appeared to be significantly less tight in our most recent economic analysis, even though both have been modestly moving in the “less tight” direction recently. That conclusion is supported by the data up to September, where both the fill rate and the ratio of available jobs to unemployment are still relatively high. However, the ratio of job vacancies to unemployment points to a more dramatic shift in labour market dynamics than was previously the case. In addition to being high, the ratio is also significantly higher than what is predicted by pre-pandemic relationships (the straight black line), which suggests that a significant increase in the unemployment rate would be necessary to produce a more sustainable labour market. According to the estimates below, the fill rate is also high but is less than its trend, which shows that a mild softening in conditions can lead to a sustainable labour market.

The implied tightness of the labour market as determined by the Beveridge Curve and the fill rate differ significantly from one another for a number of reasons. With the exception of the time right before the pandemic, transitions from being out of the labour force into employment are low and transitions from being out of the labour force into unemployment are high relative to the previous business cycle. Although this trend tends to intensify as the unemployment rate declines, its current intensity is rather high. Despite flows from employment to labour force nonparticipation being just slightly raised, the quit rate is relatively high. Since the start of 2021, a growing percentage of people who are employed have had more than one job. All of these trends suggest that a greater proportion of those accepting jobs are not coming from the ranks of the unemployed. The fill rate becomes even more crucial to monitor if the pool of potential employees is higher than implied by the pool’s historical relationship to the conventional indication of labour market tightness—active job seekers without a current job, or the unemployed.

The fill rate indicates that less easing of the labour market is necessary to attain a sustainable pace

The Beveridge Curve (Figure 1a) predicts that the unemployment rate would exceed 10% if the total nonfarm job opening rate were to drop from its present rate of 6.5 percent to its 2019 average of roughly 4.5 percent. In other words, it looks like the labour market is so tight right now that maintaining the current hiring rate suggests that the unemployment rate would need to nearly triple from its September level.

In terms of the Beveridge Curve at least, the pattern for the fill rate over 2021 and 2022 is more in line with the previous two decades. The link between job opportunities and hires suggests that there may not be as much market disruption as previously believed in order to maintain a consistent rate of job vacancies. Recent data suggests that the nonfarm hires rate, if the job opening rate were to return to its 2019 average, would be 3.6 percent, down from the present rate of 4.0 percent and consistent with the hiring pace in 2014 and 2015. [1] Returning to the job market in 2014–15 would be much less upsetting than doing so in a market with a 10% unemployment rate and one similar to that of 2009–10.

The dynamics of inflation and wages are explained by both indices

The fill rate and the Beveridge Curve both contribute to the explanation of price and wage inflation. Based on regressions (Phillips Curve equations) of several inflation indicators on the ratios, Table 1 displays these associations (or more precisely, the inverse of the ratios). The Employment Cost Index measures pay inflation, while the Consumer Price Index, excluding food and energy, measures price inflation (ECI). Additionally, models were estimated utilising lags in inflation (the autoregressive model in the table). On the basis of pre-pandemic data from the fourth quarter of 2007 to the fourth quarter of 2019, we estimate these correlations.

Figure 2 As anticipated by the models we estimate using the openings-to-unemployment (dashed line) or the openings-to-hires ratios, displays inflation rates based on core CPI (teal) and the ECI (purple) alongside actual values (dotted line). The “predicted” lines in the graph should be understood as the expected contributions of the tightening labour market to the increase in inflation.

• First, anticipated values are relatively flat, reflecting the well-established fact that over the 2007–2019 period—the timeframe we use to analyse the relationship between the labour market indicators and inflation—inflation was only tangentially related to labour market measures.
• Second, using the relationship between 2007 and 19 to predict out-of-sample outcomes for 2021 and 2022 reveals that price and wage inflation are a little more sensitive to recent changes in the openings-to-hires ratio; thus, the dotted lines contribute more to predicted inflation than the dashed lines.
• Third, recent rises in both labour market ratios generally indicate little further upward pressure on inflation; for instance, core CPI inflation is forecast to remain at or below 2.5 percent in the third quarter of 2022, only slightly higher than in the first.
• Finally, a decrease in this indicator to pre-pandemic levels would probably cut future inflation more than a decline in the openings-to-unemployment ratio would. This is because expected inflation is more sensitive to the fill rate.

In other words, moderate fill rate drops indicate a greater easing of inflation than moderate openings-to-unemployment ratio declines.

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Analysis by: Advocacy Unified Network