Unemployed Burn as Fed Fiddles in Debate Over Natural Rate: Jobs

Federal Reserve officials and economic advisers are debating far-reaching differences on whether to accept a jobless rate that doesn’t fall much below 6.5 percent or act more aggressively to reduce it to 5 percent or less.

David Horowitz says he’s “not enough of an economist” to know who’s right. He just wants a full-time job again.

Horowitz, 47, says he lost his health policy analyst job in Washington a month before the U.S. recession began in December 2007. He has met his expenses with temporary jobs in his field and work as a swim teacher, along with loans and savings.

As for the policy makers’ debate on joblessness, “if they’re declaring that it’s a permanent situation, then that does make me angry,” he said. An approach that doesn’t put job creation first “puts a lot of people out of work and makes our educations worthless, and doesn’t give much optimism about working hard and moving up.”

Horowitz and millions of other unemployed and underemployed people are searching for jobs at the same time policy makers, such as San Francisco Fed President John Williams, and economists, including former Obama administration adviser Jared Bernstein, ponder whether the current 8.1 unemployment rate will ever drop to the 5 percent level where it stood when the longest and deepest recession since the Great Depression began.

Cyclical, Structural

The debate centers on whether the jobless rate is high because of a lagging economic recovery, which can be influenced by monetary policy, or because changes in the labor market and extended unemployment have left many workers lacking necessary skills, a structural problem that the Fed can’t affect.

The central bank lowered its benchmark interest rate to near zero in December 2008 and has said economic conditions warrant keeping it there through late 2014. The Fed has expanded its balance sheet by $2.3 trillion through two rounds of large- scale asset purchases. The balance sheet reached a record $2.94 trillion in February.

In September, the central bank announced it would sell $400 billion of short-term securities and buy $400 billion in longer- term securities, to further lower borrowing costs and support the economic recovery. The program, known as Operation Twist, is scheduled to be completed in June.

Chicago Fed President Charles Evans has argued that the high level of unemployment warrants additional asset purchases and said the Fed should tolerate a higher rate of inflation as it takes more aggressive action to bolster growth.

Additional Stimulus

The Fed hasn’t taken these steps, although the minutes of its April 24-25 meeting show that “several” members of the Federal Open Market Committee believe additional stimulus could be necessary “if the economic recovery lost momentum or the downside risks to the forecast became great enough.”

Never before in postwar America has finding work taken as long. The average duration of unemployment rose to a record 41 weeks in November and remains at 39 weeks, more than double the 15-week average since the U.S. began collecting the information in 1948, according to Labor Department data.

The broader rate for underemployment, which also includes people working part-time for economic reasons and discouraged job seekers, was 14.5 percent last month. The 8.1 percent unemployment rate remains above Fed officials’ projections last month of a longer-run unemployment rate of 4.9 percent to 6 percent.

Natural Rate

Williams said in a May 3 speech that the natural rate of unemployment, which neither accelerates nor decelerates inflation, probably has risen to 6 percent to 6.5 percent today from about 5 percent before the recession, in part because workers don’t have the skills employers need and because of extended unemployment benefits. He said the rate should fall in coming years to 5.5 percent.

“The natural rate is the subject of intensive economic research and debate,” the regional Fed chief, a voting member of the Federal Open Market Committee this year, said in Santa Barbara, California. “Economists estimate it using a variety of economic and statistical models, and no two estimates agree.”

Bernstein, a senior fellow at the Center on Budget and Policy Priorities in Washington, a Washington-based group that favors policies that aid low-income Americans, says he disagrees that the full employment rate could be at 6.5 percent. More important, he says, is that joblessness is too high and policy makers should push employment and growth measures without worrying about inflation.

‘Waste Time’

“I wouldn’t waste time figuring out what the rate is as I would just try to get the darn unemployment rate down,” said Bernstein, a former chief economist for Vice President Joe Biden. “Whatever you set this rate at we’re way above it and for the Fed that’s all you need to know for the short term.”

Fed Chairman Ben S. Bernanke and Vice Chairman Janet Yellen have both said that the jobless rate is elevated because of cyclical causes more than structural. Still, Bernanke warned in a March 26 speech in Arlington, Virginia, that the long-term unemployed can lose their skills and become less likely to land a new job. Yellen said in an April 11 speech in New York that people “with such long unemployment spells could become less employable as their skills deteriorate and as they lose their connections to the labor market.”

They don’t have to tell Laura Marks, a human resources specialist in Miami who also helps run a faith-based nonprofit organization that supports job seekers and takes its mission from a 1981 papal encyclical that says “Man’s life is built up every day from work.” She says that the Back on Track Network tells members that they can’t expect to find exactly the same job again because of changes in technology and the labor market.

‘More Selective’

“The process for recruitment is much more selective and companies are looking for very specific skill sets so that’s a challenge for the job seeker,” she said. “You really need to either improve the skills you have or learn new ones to take on the new face of what is employment out there.”

Adjusting to the changes is crucial for the millions who lost jobs in industries that haven’t recovered from the recession. While some have rebounded, the gains are offset by others that haven’t, such as construction and manufacturing.

Education and health services gained 625,000 jobs in the 18-month recession that ended in June 2009 and since then have added another 1.1 million, according to BLS data. Professional and business services have recovered all but 191,000 of the 1.6 million jobs they lost.

By contrast, the construction industry lost 1.5 million jobs and since then has shed another 449,000, the data show. Manufacturing has added 222,000 positions since the contraction, which erased 2 million of those jobs.

Lost Job

One construction job lost since the recession ended belonged to Jeffrey Brawner, who installed windows and doors for a Washington builder until two years ago. After a seven-month stint in which he was unable to work because of an arm injury, and periodic work more recently at a catering company, he wants back in to the full-time workforce.

Brawner, 50, is applying to be a heating and air conditioning technician apprentice through the city of Washington’s Department of Employment Services, which he visits regularly to search for openings and consult with the staff. The apprentice program provides on-the-job training, night classes and a salaried, full-time position. If it doesn’t pan out, he said he expects to land work in another field.

“Any job that comes through I will take just to get in the door,” Brawner said May 17 at the department office. “People are hiring and companies are more confident.”

2022 Outlook

Jobless stints like Brawner’s will endure, according to government projections. The Congressional Budget Office said in a January report that the natural rate of unemployment was probably about 6 percent in 2011 and will remain elevated for years. The CBO’s Budget and Economic Outlook for 2012 to 2022 boosted its projection to 5.5 percent in 2018 and 5.3 percent in 2022, up from a prior estimate of 5.2 percent for both years.

Richmond Fed President Jeffrey Lacker, who votes on the FOMC this year, said in a May 7 speech that much unemployment results from structural weaknesses such as inadequate training that more Fed stimulus can’t fix. Extended unemployment benefits and “labor market inefficiencies,” including the difficulty in matching workers with skilled jobs could together account for as much as 5.9 percentage points of the current rate, Lacker said.

Williams said the mismatch “should diminish as workers retrain and construction and other hard-hit industries recover.” He added that once those adjustments have occurred over the next few years, he expects the natural rate of unemployment to settle at 5.5 percent.

Push Harder

Paul Krugman, the Nobel prize-winning economist and New York Times columnist, said in a May 10 column that the government must push harder to lower the jobless rate. Calling persistent unemployment “structural” doesn’t solve the problem, he wrote.

“We’re suffering not from the teething pains of some kind of structural transition that must gradually run its course but rather from an overall lack of sufficient demand -- the kind of lack that could and should be cured quickly with government programs designed to boost spending,” Krugman wrote.

For Horowitz, the academic debates don’t reduce the disappointment of not finding a job in his field even after the recession ended. Unable to secure what he wanted in the months after becoming unemployed, he became certified as a lifeguard and water safety instructor and spent most of 2009 and 2010 working full-time for fitness companies. Since then, he has returned to the field of public health, freelancing and consulting.

“I was very grateful that I could switch gears into a second line of work and had another skill,” yet it doesn’t ease the frustration of being unable to work in one’s chosen field, Horowitz said. “I went to grad school and college and I spent a lot of money on that with the expectation that I would be employed.”

To contact the reporter on this story: Jeff Kearns in Washington at jkearns3@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.