Dissecting the Beveridge Curve

Alumnus Rand Ghayad pens a groundbreaking study on long-term unemployment.

Rand Ghayad (MET’09) graduated with a master’s in Administrative Studies and a dual concentration in Financial Economics and Multinational Commerce. Currently a Visiting fellow at the Federal Reserve Bank of Boston, Ghayad has been praised for two recent public policy papers discussing the current status of the U.S. economy.

The first paper, coauthored with Northeastern University Distinguished Professor William Dickens, examines the relationship between job vacancies and unemployment as represented by the Beveridge curve. Published by the Fed as a public policy brief in October, “What Can We Learn by Disaggregating the Unemployment-Vacancy Relationship?” has since been pointed to by Nobel Prize-winning economist Paul Krugman, noted as “pioneering” by The Atlantic, considered a “major empirical win” by economist Brad Delong, and cited in articles by the New York Times, Wall Street Journal, Huffington Post, Business Week, Business Insider, and dozens more.

The Beveridge curve posits that as job vacancies go up, people get hired and unemployment goes down—and vice-versa. However, when vacancies go up and unemployment rates remain high—as became evident in 2009, in the wake of the Great recession—it causes an outward shift in the curve and raises alarms about “structural unemployment,” where workforce skills no longer correspond to those sought by employers.

By decomposing the Beveridge curve by industry, age, education, and duration of employment, Ghayad found that those who have been out of work for more than six months did not benefit from an increase in the job vacancy rate—and this was consistent across all industries and sectors, blue collar and white collar alike.

In his second public policy brief for the Fed, “A Decomposition of Shifts of the Beveridge Curve,” Ghayad concludes that, along with fears of structural unemployment, unprecedented jobless benefits can also be ruled out as the cause of continued long-term unemployment. This leaves one explanation as to why those with long unemployment spells are doing poorly in the labor market—hiring discrimination against the long-term unemployed.

Metropolitan had an opportunity to ask Ghayad some follow-up questions about his research:

Metropolitan: What made you curious about job vacancy versus unemployment rates?

The fraction of total unemployed who have been out of work for more than six months reached an unprecedented rate in 2010, and remained high despite the increase in job openings since the end of 2009. This spike in long-term unemployment raised an alarm for me and made me curious to explore whether applicants with long unemployment durations are benefiting less than others from the recovery. With data from the current population survey, I was able to explore the behavior of applicants with different unemployment durations during the period when the aggregate Beveridge curve was shifting.

What conclusions did you draw in your findings?

Results from the Beveridge curve paper showed that the shift in the aggregate Beveridge curve relationship is concentrated solely among the long-term unemployed. In other words, the long-term unemployed were not benefiting from the increase in vacancies during the recovery, while those with short unemployment durations (less than six months) were behaving normally.

How did you determine that long-term unemployment wasn’t structural?

In 2012, I sent 4,800 fictional résumés to firms around the U.S. Résumés were identical in all aspects except duration of unemployment and industry experience. I tracked firms’ responses by recording which résumés received interview invitations. The experiment revealed very little response for applicants with long unemployment durations. Even if you come from the same industry as the prospective employer, those employers are more likely to prefer someone with no relevant experience, but a shorter duration of unemployment.

What are the realities that the long-term unemployed face?

It is widely believed that long periods out of work make someone less attractive to an employer. Individuals may lose their ties and connections and become less attached to the labor market. Many believe that skills deteriorate with time and become obsolete. Some jobseekers may lose hope and decide to exit the labor market and stop searching. This problem is new to the U.S. Long-term unemployment has always been a problem in Europe—without strong policy responses, there are fears that we are beginning to look a lot like Europe.

Are there any possible solutions to the hurdles of invisible discrimination?

In March, the New York City Council passed a bill amending the New York City Human Rights Law to prohibit discrimination based on an individual’s unemployment. Among other things, the law prohibits New York City employers (who have at least four employees) and employment agencies from basing employment decisions regarding hiring, or the terms, conditions, or privileges of employment on an applicant’s unemployment. Oregon and New Jersey have passed similar bills in the past year.

Do you think we could have a populace of the permanently unemployed?

It seems unlikely that any kind of rule to ban discrimination against the long-term unemployed would actually halt the use of discriminatory heuristics. In my opinion, we need more stimulus and job creation to push firms to reach the end of the job queue and start looking at the résumés of the long-term unemployed. We face a trade-off. Attempts to lower unemployment can increase the risk of both inflation and debt. The reverse is true as well—attempts to lower debt and reduce the risk of inflation can increase unemployment.

In my view, we are too worried about inflation and debt, and not worried enough about unemployment. There are no signs of price pressure yet: inflation is presently a bit below target and long-run expectations are stable. And the Fed has a new tool to fight inflation it didn’t have prior to the Great Recession—the interest it pays on reserves. Between debt, inflation, and unemployment, I am least worried about inflation. We have the tools to prevent it, and it’s less costly than long-term unemployment if it occurs. As a solution for long-term unemployment, the first thing is to balance state and local budgets (the federal government has to fund states so they can hire back many of those people who were laid off). And this will have a multiplier effect.

How did your studies at MET prepare you for this type of research and analysis?

The Administrative Studies Financial Economics concentration is the foundation behind many of the things I do today. Having a background in finance differentiates me from other labor economists who work on similar topics. Every class had its unique taste and added value. It is the ideal program for someone who wants to learn how things work outside the classroom. The program was a great blend of theory and case studies which prepared me well for a quantitative PhD program.

Who at MET inspired you, or influenced the way you think about economics?

I met great people and was inspired by the work of many professors who were always there to talk and help. Associate Professor Kip Becker was my mentor and the person who pushed me to do research. He is one of the greatest people I have ever met or worked with. We worked on a few projects together, and he got me involved in his own research, which opened the gate for many interesting and new research questions.