Policy Doubt Damping Hiring, Boosting Unemployment, SF Fed Says

The U.S. unemployment rate is higher than the strength of the economy would suggest because of uncertainty over the course of fiscal and monetary policy, a Federal Reserve Bank of San Francisco study found.

“Without policy uncertainty, the unemployment rate in late 2012 would have been close to 6.5 percent, 1.3 percentage points lower than the actual rate,” Sylvain Leduc and Zhen Liu said in a research note released today by the district bank. “Heightened uncertainty about economic policy during the recovery made businesses more reluctant to hire workers.”

Fed policy makers, seeking to get the U.S. economy back to full employment, have been debating why unemployment has remained so high despite four years of economic expansion and record monetary stimulus. Particularly vexing has been an unusually high number of jobs going unfilled given the high rate of unemployment. That relationship is known as the Beveridge curve.

“When uncertainty rises, businesses become more hesitant to hire,” Leduc and Liu wrote. “They reduce recruiting efforts by raising hiring standards, increasing the number of interviews, or simply not filling vacancies.”

Other hypotheses for the shifted Beveridge curve have included a wider mismatch between the skills workers have and the skills employers demand, as well as an expansion of unemployment benefits that reduced incentives for the jobless to seek work. Policy uncertainty may account for as much as two-thirds of the distorted relationship between unemployment and vacancies, the San Francisco Fed researchers found.

They based their conclusion on a gauge of policy uncertainty that measures such things as the number of tax code provisions about to expire, the extent of disagreement in forecasts of inflation and government spending and the number of newspaper articles that discuss economic policy uncertainty.

“As the economy recovers and uncertainty recedes, our finding suggests that the Beveridge curve should return to its pre-recession position and the pace of job recovery should accelerate,” the said.

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