Want to know what Federal Reserve policy makers are thinking at any given time? Take a look at what the research staff is doing.
Back in the early 1990s, the staff was busy trying to explain the inexplicable weakness in M2, the Fed’s broad monetary aggregate. Nowadays its efforts are focused on unemployment.
Fed chief Ben Bernanke wants to understand why the unemployment rate has fallen so much in the face of weak economic growth, defying past relationships between the two measures. His quest is pretty much confined to econometric models.
The hawks on the policy committee are more interested in the nature of today’s 8.1 percent unemployment: whether it’s cyclical, a result of a deep recession and tepid recovery, or structural, which implies impediments to suitable match-making between employers and job seekers. For this group, the Bureau of Labor Statistics’ monthly job openings and labor turnover survey, or JOLTS, offers some real-world clues.
Job openings are one component of something called the Beveridge Curve, which describes the relationship between vacancies and unemployment. In an expanding economy, the unemployment rate is low and the vacancy rate is high as job openings go unfilled. The opposite is true during recessions. The Beveridge Curve, in other words, is downward sloping.
Movements along the Beveridge Curve are normal during the business cycle. What’s happening now is that the curve has shifted outward, to the right, so that for any given level of unemployment, there are more job openings.
Using the Conference Board’s Help-Wanted Advertising Index as a proxy for job openings, economists at the Cleveland Fed constructed a Beveridge Curve going back to the 1973-1975 recession. Their research suggests outward shifts following contractions aren’t unusual.
The curve shift is much more pronounced this time. While it’s too soon to draw any firm conclusions, there are indications that today’s high unemployment reflects a mismatch between jobs that are available and the skill set or location of those eager to fill them.
And that has implications for policy makers. Operating under the assumption that more stimulus will create more jobs, the Fed reduced its benchmark interest rate to 0 to 0.25 percent, pledged to keep it there at least through the end of 2014 and engaged in multiple rounds of bond buying to lower long-term interest rates. The Fed rationalized its stance, well after the crisis and recession had passed, as necessary to fulfill its full-employment mandate.
What if the Fed, through all its efforts, can’t buy more employment? What if unemployment is structural, with an inadequately trained workforce or labor immobility preventing employers and job seekers from hooking up?
Signs are pointing in this direction. Long-term unemployment hasn’t been this high for this long since World War II, with 41.3 percent of the unemployed out of work for 27 weeks or more in April. The longer Americans are out of work, the more obsolete their skills.
Second, the U.S. is falling behind when it comes to educating and training today’s students for the jobs of tomorrow. Some Midwest manufacturing companies, faced with a dearth of skilled candidates, are partnering with local community colleges to train the high-tech machinists they so badly need. Subsidizing tuition turns out to be more cost- effective than on-the-job training -- and something best coordinated at a local level.
Third, some American workers, at least those not constrained by language or other barriers, can’t relocate to a better job market because they are burdened with a home they can’t sell. Housing, which usually leads the business cycle, is still in the process of bottoming.
If you have never looked at the JOLTS or 12 years of available data on labor turnover, you probably didn’t know that 50 million Americans found a job last year while 48.2 million left a job or were fired. New hires represented 38.1 percent of total employment last year. In 2005, the share was 47.2 percent.
Impressive, isn’t it? Yes, there’s some double, even triple, counting in the JOLTS. A short-order cook who changes jobs three times in one year is counted three times. Still, with everyone hyperfocused on the small net change in employment in any given month, it’s easy to forget just how flexible the U.S. labor market really is.
Flexible, yes. Magical, no. It can’t turn a machine-tool operator into a circuit-board designer overnight. And neither can the Fed.
Structural unemployment, like the nation’s other fundamental deficits, is a tough challenge for policy makers all around. Jobs are a big issue in the presidential election. No elected or appointed official wants to see the public suffer, financially or emotionally, from being unemployed. There’s a strong desire to do something even if nothing is the lesser of two evils.
On the fiscal front, attempts to correct long-term structural imbalances with short-term tax-and-spending policy are doomed. Cyclical medicine leaves the patient with more debt and the same old ailments.
What happens if the monetary authority misdiagnoses the cause of high unemployment and uses its usual tool, the printing press, as a cure? For the same money, the Fed will buy itself more inflation and less growth. That’s the sort of jolt the economy can do without.
(Caroline Baum, author of “Just What I Said,” is a Bloomberg View columnist. The opinions expressed are her own.)
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