Michal Stelmach, James Kensett and Philip Schnattinger

Economists frequently use the vacancies to unemployment (V/U) ratio to measure labour market tightness. Analysis of the labour market during the current inflationary period often assumes the V/U ratio is constant and compares this measure with a supposed pre-2019 equilibrium. However, the V/U ratio has trended upwards over recent decades. We explore the impact of changing vacancy posting costs on equilibrium labour market tightness through the lens of two models: an empirical error-correction model; and a simple structural ‘search and matching’ model. We find that the raw V/U ratio can be misleading for conclusions about labour market tightness. We outline an improved measure – the VU gap – which indicates that the UK labour market returned to a broadly balanced position in 2024 H2.