Box Analysis A: NIESR UK Economic Outlook - Autumn 2024

The inability of the unemployment rate to predict nominal wage growth before and after the pandemic has led some policymakers and academics to abandon it as the preferred measure of slack.1 Instead, labour market tightness, measured as the ratio of the level of vacancies to that of unemployment has become the preferred measure. [...] Thus, the consensus is that the vacancy to unemployment ratio is currently a better measure of labour market slack than the unemployment rate because it can (at least partly) account for the persistent upward wage pressure that has underpinned the UK economy for the last three years in a way that is consistent with the state of the labour market before the pandemic. [...] The number of lags that we include for each variable is selected using a Bayesian Information Criterion which trades off the goodness-of-fit of the model against the parsimony of the model. [...] This lends support to the recent adoption of the vacancy to unemployment ratio over the unemployment rate as the preferred measure of labour market slack. [...] Insights from the Beveridge Curve and Phillips Curve What has caused the deterioration in the unemployment rate as a measure of slack relative to the vacancy to unemployment ratio? In their analysis of the United States, Beningo and Eggertson (2024) propose that the persistence in post-pandemic inflation can be explained by labour shortages.