Unemployment, Vacancies and Wage Inflation

Simon Wren-Lewis's post on the NAIRU (that I discussed in may last post) prompted a lot of interesting comments.  I thought it worth expanding a bit on what I wrote previously.  The chart below shows unemployment and vacancies in the UK.

The obvious thing here is that there is a negative correlation between the two.  Higher vacancies are associated with lower unemployment.

This reflects the level of overall demand in the economy.  Higher demand leads firms wanting to take on more staff and therefore to the creation of more vacancies.  Some of these positions will be filled by the unemployed, reducing their numbers.  Other positions will remain unfilled.

The filling of vacancies does not always come from the ranks of the unemployed.  In some cases, firms will hire by enticing workers to move from other firms (I would guess this is actually the majority of cases, but I don't know where to find data on this).  This process generally requires recruiting firms to offer higher wages.  The more vacancies they need to fill, the more pressure to raise wage offers.  At the same time, other firms may need to raise wages to prevent staff leaving.

The more vacancies there are then, the more wage inflation pressure there is.  And the relationship between vacancies and unemployment is clear.  The much more difficult question is whether this wage inflation pressure gives rise to stable inflation or accelerating inflation.