A benchmark for wage growth through the lens of the Beveridge curve

ABSTRACT

Using an estimated Beveridge curve, we trace out the vacancy–unemployment ratio in the steady state. This steady-state measure for labour market tightness is embedded in a VAR framework to obtain a benchmark for wage growth reflecting a labour market equilibrium.

KEYWORDS:

• Beveridge curve
• vacancy–unemployment ratio
• wage dynamics
• equilibrium wage growth

JEL CLASSIFICATION:

• E24
• E32
• J63

Acknowledgements

I would like to thank Dirk Bursian, Christian Hutter, and Enzo Weber for helpful comments and suggestions.

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

¹ Based on regionally differentiated datasets, Börsch-Supan (1991) and Kosfeld, Dreger, and Eckey (2008) are more sceptical about the existence of a Beveridge curve for Germany.

² Fahr and Sunde (2009) provide preliminary evidence for an inward shift based on data up to 2006, only one year after the final part of the labour market reforms was implemented.

³ is the sample average of labour force growth.

⁴ The vacancy rate is the ratio of the number of aggregate job postings to total employment. Aggregate job postings are calculated by multiplying the number of vacancies registered at the Federal Employment Agency (excluding subsidised employment) with the share of registered vacancies of the total vacancies estimated by the Research Institute of the Federal Employment Agency.

⁵ The Beveridge curve shift is taken into account by allowing for successive shifts starting in 2007 until the sample end by introducing impulse dummies for each quarter from 2007 to 2015 in the estimation equations for the transition rates.