Equilibrium U.S. Unemployment Level Climbs to 7%, Barclays Says

Janet Yellen
Janet Yellen, nominee for vice chairman of the U.S. Federal Reserve, speaks during a Senate Banking Committee hearing in Washington. Photographer: Andrew Harrer/Bloomberg

The equilibrium level of U.S. joblessness has climbed as a result of the surge in long-term unemployment caused by the recession, according to Barclays Capital Inc.

The so-called NAIRU, or jobless rate that is consistent with stable inflation, is now around 7 percent, up from about 5 percent before the economic slump began in December 2007, Peter Newland, an economist at Barclays Capital in New York, said in a July 22 note to clients.

“Higher unemployment is here to stay,” Newland wrote.

An ageing workforce, the loss of jobs in industries like manufacturing and construction and a decrease in worker mobility have contributed in pushing up the stasis point, said Newland. It will be crucial for Federal Reserve policy makers to realize the rate has shifted in order for central bankers to prevent prices from climbing once the labor market begins to recover.

Older workers, once unemployed, tend to remain jobless longer than their younger counterparts, according to Barclays research. So as the labor force ages, unemployment too will tend to climb, Newland said.

Factories and construction firms, which accounted for 4 million of the 8.4 million jobs lost in the two years ended in December, are historically slow to rehire workers once the economy picks up, said Newland. Additionally, workers in these fields may find it difficult to switch to other industries because they are relatively well paid and have specific skills that are not easily transferred, he said.

Less Mobility

Finally, the residential real-estate slump reduces the odds jobless workers will be able to sell their houses and relocate to parts of the country where more jobs may be available, Newland said.

“Several” members of the Fed’s policy-making Federal Open Market Committee, including Janet Yellen, are in the camp that believes the jump in employment is a short-term reaction to the recession rather than a more permanent shift, said Newland. They believe that joblessness eventually therefore will fall back to pre-recession levels, he said. Yellen is President Barack Obama’s choice to be the Fed’s next vice chairman.

“Were this view to persist when the time comes to tighten, it could lead to policy staying too loose for too long,” Newland wrote.

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