Fed Easing No Long Term Fix for Structural Unemployment
Any action the Federal Reserve announces at its November policy meeting may not do much to help Timco Aviation Services hire 300 people.
While a new round of asset purchases may help reduce cyclical joblessness, the result of weak demand in a battered economy, it may not have much effect on structural unemployment, losses caused by changes in the labor market.
“What you have is a great workforce in the local area that have been working in textiles or furniture, but they’re not trained in aviation-specific skills,” said Kevin Carter, the Greensboro, North Carolina, company’s co-chief executive officer, who is struggling to fill positions that require qualifications such as an FAA airframe and power-plant certificate.
Debate about what has caused the unemployment rate to stall at or above 9.5 percent since August 2009 is dividing Chairman Ben S. Bernanke’s Federal Open Market Committee. Chicago Fed President Charles Evans and Boston’s Eric Rosengren have downplayed the role of structural changes in recent speeches and favor additional action to boost the economy. Philadelphia’s Charles Plosser and Minneapolis’s Narayana Kocherlakota have said shifts in the labor market may reduce the effectiveness of additional Treasury purchases.
That division may prompt the FOMC to favor an incremental plan at its Nov. 2-3 meeting, which gives it flexibility “to say ‘Okay, we’ll do a couple of months, and as it becomes more apparent how the economy is unfolding, we can phase out the purchases, rather than commit to $1 trillion or $2 trillion,’” said Carl Riccadonna, senior U.S. economist at Deutsche Bank Securities Inc. in New York. “It is a better approach, and I think it will be easier for Chairman Bernanke to get a fairly unified endorsement from the committee.”
This strategy may disappoint investors, said John Canally, an economist and investment strategist at Boston-based LPL Financial Corp., which oversees $276.9 billion in assets.
“The flexible approach allows them to throw a bone” to members like Plosser and Kocherlakota, Canally said. The “kneejerk” reaction “may strengthen the dollar, weaken stocks and have Treasury yields go up, at least initially, because buying won’t be as big as people thought.”
The Standard & Poor’s 500 Index was 1,165.15 at 4 p.m. in New York on Oct. 8. The yield on the 10-year note was 2.39 percent at 5:32 p.m. after touching 2.3302 percent, the lowest level since Jan. 20, 2009, according to BGCantor Market Data.
Companies added 64,000 jobs in September, less than forecast, while government payrolls fell by 159,000, including 77,000 temporary census workers, according to the Labor Department in Washington. The unemployment rate remained at 9.6 percent for a second month.
‘Surviving’ on Unemployment
Victor Calix Cruz, 51, has been job hunting for two years after being laid off from construction work in Miami. He, his wife and their two teenage children are “surviving” on his wife’s disability and his unemployment payments, he said. While he heard of openings at hotels, he hasn’t applied because the pay and benefits aren’t as good as what he had before.
“I don’t know what I’m going to do” if the work doesn’t come back, he said, adding that he hopes to get a job in the next few months on the Port of Miami Tunnel Project.
Two FOMC policy makers project the longer-run unemployment rate at 6 percent or higher, according to the minutes of the June 22-23 meeting, which doesn’t identify the members. The forecast of the other 15 is between 5 percent and 5.5 percent, a proxy for their views of how low the rate can go without endangering price stability.
These estimates are likely too low, said Michelle Meyer, a senior U.S. economist at BofA Merrill Lynch Global Research in New York. She sees the nonaccelerating inflation rate of unemployment at about 7 percent, with structural changes accounting for about half the increase during the recession. This still leaves “a good amount” that reflects “the sharp decline in demand, which means it’s cyclical,” she said. “Monetary policy should be able to address that.”
With the benchmark rate for overnight loans among banks near zero, policymakers have said they’re considering expanding the Fed’s balance sheet to boost the economy. Such a move should be done in increments, similar to the central bank’s gradual adjustment in the federal funds rate, rather than a “shock-and- awe” policy of announcing a large amount of purchases at once, St. Louis Fed President James Bullard said in an Aug. 19 speech in Rogers, Arkansas.
The Fed’s total assets are $2.3 trillion after it purchased $1.43 trillion in housing debt and $300 billion in Treasuries.
Buying an additional $500 billion in government debt would be the equivalent of a 0.5 to 0.75 percentage point cut in the benchmark rate, depending on how long investors expect the central bank will hold the assets, New York Fed President William Dudley, who also serves as vice-chairman of the FOMC, said in an Oct. 1 speech.
Doreen Baker, 60, a long-time development director for Chicago nonprofits, doesn’t see how that would help her find a job after being out of work for a year.
“I believe interest rates have gone about as low as they can go,” she said.
Firms such as IHS Global Insight, Moody’s Analytics Inc. and Macroeconomic Advisers LLC with large-scale models of the U.S. economy also project that more Fed easing would have little impact. IHS Global Insight’s models show that $500 billion of purchases would boost growth 0.1 percentage point next year and leave the unemployment rate at or above 9 percent for the next two years.
Purchases up to $2 trillion would raise the annual growth rate of gross domestic product by 0.3 percentage point in 2011 and by 0.4 percentage point in 2012, Macroeconomic Advisers estimates.
Plosser has said he doesn’t think a new round of unconventional stimulus will help put people back to work.
If the Fed renews asset purchases and “says we’re trying to fix the unemployment problem and it doesn’t fix it -- and I don’t think it will,” then the central bank will “lose credibility,” he told reporters after a Sept. 29 speech in New Jersey.
The skills mismatch that’s creating problems for Timco Aviation isn’t the only driver of structural unemployment. The collapse of the nation’s housing market also prevents some people from moving to take a new job.
While potential employees “would love to come work for us in Greensboro,” some own houses they can’t sell, which “makes it really difficult,” Carter said.
‘Desperate’ Job Seekers
So he has partnered with Guilford Technical Community College in Jamestown, North Carolina, to retrain people from local textile, furniture and other shrinking industries who are “desperate, looking for jobs but they don’t have the skills or the knowledge” for a new industry, said Ed Frye, chair of Guilford’s transportation-systems technology division.
The region has been especially hard hit because the collapse in global demand came atop a long-term restructuring of the economy as manufacturing jobs declined, Richmond Fed President Jeffrey Lacker said in a May speech in Greensboro.
Employment soared during the housing bubble as builders broke ground on as many as 2.27 million homes at an annual pace, according to the report. When the industry collapsed along with home prices, unemployment peaked at 27.1 percent for construction workers, and the industry now has more than 20 job seekers for each opening, Silvia and Khan wrote.
‘No Easy Fixes’
“The presence of structural unemployment means there are no easy fixes, and any recovery in the labor market could be agonizingly slow,” they wrote.
Joel Sarfati, executive director of 40Plus of Greater Washington, a group that provides peer and job-search support for the unemployed, said cutbacks in his area have affected architects, lawyers and librarians.
“I have been around a long, long time and I have never seen it this bad,” said Sarfati, 71. Monday networking sessions have expanded from 15 to 20 people before the recession to between 45 and 75 now.
Participants often face “code words” on interviews such as “you are too experienced,” he said, which means employers think they will want too much money, won’t fit in with a younger staff or will abandon the job once they find a better one.
“We have had sit-down sessions when we have taken some of our members, mostly in their 40s and early 50s, and brought in people in their 20s, you know, trying to get a dialogue going,” Sarfati says. “At the end of this session, both groups realized they needed the other.”
Hugh Robinson, 61, attended the Monday meetings when he lost his job as a mortgage broker. After searching for a year and a half to see if he could apply his skills to government contracting, his contacts at 40Plus taught him how to navigate federal employment websites. He got five interviews and two job offers.
“The older you get, companies are not supposed to discriminate, but they do,” Robinson said. “This recession is the hardest” in “my working life.”
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