The Swiss Beveridge curve and inflation

The Beveridge curve – the relationship between the rate of unemployment and the vacancy rate – plays an important role in judging the state of the labour market. As the labour market tightens - vacancies rise and the unemployment rate falls - inflation pressures tend to build. The Beveridge curve is therefore a useful tool for policymakers to help understand the state of the labour market and inflation pressures, as EFG chief economist Stefan Gerlach explores in this Macro Flash Note.

The Swiss Beveridge curve

The figure below shows the Swiss Beveridge curve over the period January 2000 to September 2024. The vertical axis shows the vacancy rate (the number of jobs available divided by the size of the labour force) and the horizontal axis shows the joblessness or unemployment rate.¹

Chart 1 distinguishes between three periods:

1. January 2000 to September 2008 when Lehman Brothers collapsed, triggering the Global Financial Crisis.
2. October 2008 to December 2019.
3. January 2020 when the covid pandemic started to September 2024.

Source: SNB. Data as at 9 November 2024.

The figure shows the inverse relationship – the Beveridge curve – between the unemployment rate and the vacancy rate. This relationship arises through a process that matches jobseekers with vacant positions.

Consider a business cycle downturn. With weak economic activity, many workers will have lost their jobs and few companies will have open positions to fill. But with many workers looking for employment, it is easy for hiring firms to find workers. Positions therefore stand vacant for short periods of time and at any point in time few positions are available.

The situation is the opposite in a business cycle expansion: many firms want to find new workers, but there are few workers unemployed. It is therefore difficult to find a good match for vacant positions, leading to longer search times and therefore to many vacant positions at any point in time. As these thought experiments indicate, business cycle fluctuations will trace out the Beveridge curve.

However, and as shown in Chart 2, the Beveridge curve can shift over time because of changes in the process matching workers looking for jobs with firms seeking workers.

Suppose that firms become pickier in selecting workers or that workers may be choosier in accepting job offers, both of which would result in positions being vacant for longer periods of time. During Covid, workers often avoided jobs with frequent customer contact and some decided to retire early because of the risk of contagion. Since the matching process functioned less well, there were a larger number of vacant positions for any given unemployment rate, that is, the Beveridge curve shifted outward.

With that as background, it is instructive to look at the Beveridge curve since early 2023. The figure below shows that the joblessness rate has risen by about 0.6% and the vacancy rate has fallen by around 0.4% over this period.

Source: SNB. Data as at 9 November 2024.

This segment of the Beveridge curve shows a continuous worsening of the state of the labour market in the last 18 months of data.

The Beveridge curve and inflation

To understand why the Beveridge curve matters for the Swiss National Bank (SNB), Chart 3 shows the ratio between the vacancy rate, V, and the joblessness rate, U, as a measure of the state of the labour market. That ratio will be high when the labour market is tight, and low when the labour market is weak.

Source: SNB. Data as at 9 November 2024

The graph shows that the state of the labour market is closely tied to the rate of inflation. From that perspective, the ongoing softening of the labour market suggests that inflation pressures in Switzerland are abating even further, and that additional interest rate cuts by the SNB should be expected.

¹ There was a break in the data on vacancies in July 2018, resulting from tightened reporting requirements that led the vacancy rate to jump by 0.3%. To allow a comparison of the recent data with the older data, 0.3% is added to the data before July 2018.

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