RDP 9305: The Unemployment/Vacancy Relationship in Australia 1. Introduction

This paper examines the relationship between unemployment and job vacancies in Australia over the period 1966 to 1992, with particular emphasis on the period since 1979. This relationship, commonly known as the Beveridge Curve (BC), is of interest because it provides an indication of how effectively unemployed workers are matched with opportunities for employment; i.e. it forms a measure of the efficiency of the labour market. The mid-1970s saw a sharp increase in the unemployment rate for any given vacancy rate, implying a deterioration in this efficiency. Thus, the large increases in unemployment at that time were not only cyclical but reflected an increase in the equilibrium rate of unemployment, which has not since been reversed^[1].

Our aim in this paper is to determine the causes of shifts in the unemployment/vacancy (UV) relationship. We use data on gross flows to and from employment, unemployment and outside the labour force to estimate an equilibrium Beveridge Curve. In doing so, we investigate the effects of job-search effectiveness, the ratio of unemployment benefits to average wages, industry and regional mismatch, and other variables in determining the position of the UV relationship and, by implication, the equilibrium rate of unemployment. We find some weak evidence of an outwards shift of the BC, and hence the equilibrium rate of unemployment, between 1980 and 1989.

Section 2 provides a background to the Beveridge Curve and reviews some of the existing literature. In Section 3 we estimate some simple functional forms for the BC over a sample period beginning in 1966. In Section 4 we estimate an equilibrium BC using a functional form suggested by Layard, Nickell and Jackman (1991). We extend the Layard et al. model to include exits outside the labour force, and separate consideration of men and women, and offer some concluding remarks in Section 5.

Footnote

See Fahrer and Heath (1992) for analysis of the evolution of employment and unemployment since 1966. [1]