Fed Watch: Too Late for the Unemployed?
Tim Duy says that while Ben Bernanke suggested that the main unemployment problem was cyclical, not structural in his speech at Jackson Hole, Federal Reserve policymakers are increasingly adopting the structural view. Unfortunately, the belief that unemployment is mostly structural is a self-fulfilling proposition:
Too Late For The Unemployed?, by Tim Duy: The debate about whether unemployment is cyclical or structural unemployment arose last year. At this point, it looks like Federal Reserve policymakers increasingly favor the structural side of the debate.
Federal Reserve Chairman Ben Bernanke, speaking at Jackson Hole, suggested that cyclical unemployment remains the primary economic challenge:
Normally, monetary or fiscal policies aimed primarily at promoting a faster pace of economic recovery in the near term would not be expected to significantly affect the longer-term performance of the economy. However, current circumstances may be an exception to that standard view--the exception to which I alluded earlier. Our economy is suffering today from an extraordinarily high level of long-term unemployment, with nearly half of the unemployed having been out of work for more than six months. Under these unusual circumstances, policies that promote a stronger recovery in the near term may serve longer-term objectives as well. In the short term, putting people back to work reduces the hardships inflicted by difficult economic times and helps ensure that our economy is producing at its full potential rather than leaving productive resources fallow.
Note that he does not conclude the long-term unemployed are by definition structurally unemployed. Still, he continues to suggest that cyclical unemployment can turn structural:
In the longer term, minimizing the duration of unemployment supports a healthy economy by avoiding some of the erosion of skills and loss of attachment to the labor force that is often associated with long-term unemployment.
But, as is well known, he throws the ball to the fiscal authorities:
Notwithstanding this observation, which adds urgency to the need to achieve a cyclical recovery in employment, most of the economic policies that support robust economic growth in the long run are outside the province of the central bank. We have heard a great deal lately about federal fiscal policy in the United States, so I will close with some thoughts on that topic, focusing on the role of fiscal policy in promoting stability and growth.
But is it already too late? Has the cyclical unemployment turned structural? This week, serial-dissenter Philadelphia Federal Reserve President Charles Plosser embraced the structural view:
These numbers are troubling, especially when more than 40 percent of the unemployed, or some 6 million people, have been out of work for 27 weeks or longer. This underscores that we should not expect any easy solution. Millions of unemployed workers may take longer to find jobs because their skills have depreciated or they may need to seek employment in other sectors. These structural issues will take time to resolve. Jobs and workers will need to be reallocated across the economy, which is a long and slow process.
Plosser takes the rise in long-term unemployment as an indication of structural unemployment. He then extends the point to fight the last war:
We have provided a great deal of monetary accommodation to the economy, and given the stubbornness of the unemployment rate in responding to these efforts, we should be cautious and vigilant that our previous accommodative policies do not translate into a steady rise in inflation over the medium term even while the unemployment rate remains elevated. Creating an environment of stagflation, reminiscent of the 1970s, will not help businesses, the unemployed, or the consumer. It is an outcome we must carefully guard against.
Likewise, the centrist Atlanta Federal Reserve President Dennis Lockhart also speaks of structural factors with respect to the long-term unemployed, even invoking a comparison with Europe:
I was concerned by not only the persistence of high unemployment but also the complicated internal dynamics of the current labor market. To me, it is not clear to what degree structural factors are impeding the filling of job vacancies. And with some 43 percent of the unemployed out of work for more than six months, it is not clear to what extent the long-term unemployed are becoming a class of permanently unemployed, creating a problem resembling the so-called structural unemployment of some European countries. Further, it is not clear why participation in the labor force continues to fall. Finally, it is not clear what level of unemployment should be considered the natural or equilibrium rate under current circumstances.
Not to be outdone, the difficult-to-categorize St. Louis Federal Reserve Chairman James Bullard also looks to Europe for guidance. From his presentation this week:
- Unfortunately, unemployment rates have a checkered history in advanced economies over the last several decades.
- In particular, “hysteresis” has been a common problem, in which unemployment rises and simply stays high.
- This occurred in Europe during the last 30 years.
- If such an outcome happened in the U.S., and monetary policy was explicitly tied to unemployment outcomes, monetary policy could be pulled off course for a generation.
Now, it seems to me premature to be looking to Europe as an example. It seems reasonably obvious the unemployment problem is the result of a severe negative shock to spending. You might say no, it is structural in that we can no longer rely on housing to support incomes. But that just boils down to a spending problem - unemployment was at the natural rate as long as households and firms had the ability and willingness to spend. Moreover, I am a bit hard pressed to see how America was transformed into Europe in just three years. That said, I am not the policymaker. It appears Federal Reserve members increasingly embrace the structural unemployment story, and that suggests they will hesitate to bring out substantial additional stimulus until the see greater evidence of deflation. Of course, the longer we drag our heels on the unemployment crisis, the more easily it will be for policymakers to wash their hands of the issue, as the cyclical unemployment eventually will become structural.
Posted by Mark Thoma on Saturday, October 1, 2011 at 09:27 AM in Economics, Fed Watch, Monetary Policy, Unemployment |
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