Why Job Openings Are Surging, Even With So Many People Out of Work

Tracy Alloway (0:11)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

Joe Weisenthal (0:16)

And I'm Joe Weisenthal.

Tracy Alloway (0:18)

So Joe, I know we've been spending a lot of time on the question of inflation and whether or not it's transitory. But I feel like a lot of that discourse is sort of happening at the expense of a greater focus on the labor market. And I know that sounds like a weird thing to say. But if you think that what the Fed is saying right now is that they're going to keep rates very, very low until the labor market fully recovers or recovers even more, then really we should be digging into the labor market and what full employment actually looks like.

Joe Weisenthal (0:54)

Right. And that is, I mean, I think there's two questions or there's a million questions. But A, as you say, what does, quote, full employment, unquote, our maximum employment, which the Fed establishes a precondition for rates lift off? What does that look like? That's one thing.

And then, two, why have we not seen faster job market growth? And that seems like a funny question to ask because the labor market growth has been incredibly fast since last year. Nonetheless, we do seem to be in this weird mismatch where there's lots of job openings and lots of people who are not employed.

And why haven't they? Well, what are the reasons that people who left the labor force a year ago haven't come back yet?

Tracy Alloway (1:36)

Right. This is the mystery of the labor market at the moment. So on the one hand, unemployment is higher than it was before the pandemic. I think we're still something like four million jobs short of where we were back in February 2020 And if you look at, you know, the line of where we would have been had the pandemic never actually happened, I think we're about seven million jobs short.

And yet, at the same time, you have a lot of companies, and, you know, we've spoken to at least one of them on the show, talking about the idea of a labor shortage, that they can't get the right workers in the jobs that they have open at the moment. And it turns out, there's really a perfect economic principle to capture the sort of tension between job openings and the unemployment rate. And that is something called the beverage curve.

Joe Weisenthal (2:27)

Yeah, you had a great post on this recently.

Tracy Alloway (2:29)

Thank you.

So the beverage curve is basically the relationship. That's all I wanted you to say, Joe.

Joe Weisenthal (2:35)

Yeah, I just wanted to kick it back to you. Thanks.

Tracy Alloway (2:39)

It's the relationship between the unemployment rate and the job opening rate. And normally, if you look at the beverage curve in a usual business cycle, it would be expected to move in a sort of counterclockwise loop. So, as the unemployment rate initially jumps, you would expect the rate of job openings to stay very small and then sort of gradually recover and start moving to the left as the economy healed.

Spoiler alert, that is not what has happened in this particular business cycle. Instead, we've seen something that is normally a curve.

The clue is in the name, the beverage curve. It's basically morphed into an up and down line, meaning that unemployment basically isn't moving even as the number of job openings is going higher and higher and higher. So something really appears to have changed in the labor market here. And I am pleased to say we have the perfect person to discuss all of this. He's actually the author of a recent bulletin on the beverage curve on this exact topic. We're going to be speaking with Thomas Lubik. He's a senior advisor in the Research Department at the Richmond Fed. So Tom, thanks so much for coming on.

Thomas Lubik (3:51)

Okay, thanks so much for having me, and thanks for the kind introduction.

Tracy Alloway (3:54)

Yeah, so I was really interested in this paper. Maybe just to begin with, you could lay out, you know, what is the beverage curve and how would you expect it to act in normal times?

Thomas Lubik (4:06)

So I think you've already introduced the concept of the beverage curve perfectly. So just to restate what you discussed. So the beverage curve is the relationship between the unemployment rate and the job openings rate. So job openings are open positions that businesses want to fill and looking to hire for. And this relationship is, it's a negative relationship. So when the unemployment rate is high during a downturn, job openings are low because, well, the economy is not working very well. And firms are reluctant to hire new workers because of the uncertainty of how the economy might improve. But as the economy improves and the downturn turns into an upturn, the unemployment rate falls because the job openings are being filled. And as the economy improves, firms post more open positions. So the job openings rate rises as the unemployment rate falls. And this is what we see in every recession.