Hysteresis Undermining Labor Pattern Becomes Bernanke Fed Focus
After looking for work since May 2009, Raquel Barron, 40, hears the same thing when she interviews: We don’t want to hire someone who’s been jobless for so long.
“They still put me at the bottom of the list when I tell them I’ve been unemployed for three years,” said Barron, who moved into her parents’ home in El Sobrante, California, after losing her administrative job at a construction company. “Every single day, I go on Craigslist to look at their listings. But I feel like my chances are only getting worse.”
Federal Reserve Chairman Ben S. Bernanke agrees. If the labor market heals too slowly, the 5.1 million Americans out of work for at least six months may face declining odds of ever finding a job -- leading to permanently higher unemployment, a phenomenon known as hysteresis. Bernanke says while this hasn’t happened yet -- as weak growth is mainly responsible for the “elevated” jobless rate -- the risk that it could bolsters his case to keep record monetary stimulus in place.
Never before in postwar America has finding work taken as long. The average duration of unemployment soared 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 Bureau of Labor Statistics data compiled by Bloomberg. Those jobless for six months or longer made up 41 percent of the total.
“People are less likely to find work the longer they’re unemployed for various reasons, including contacts and skills deteriorating over time, and the more that happens, the more structural unemployment increases,” said Dean Maki, chief U.S. economist at Barclays Plc in New York.
No Evidence Yet
Vice Chairman Janet Yellen said April 11 that continued monetary accommodation is warranted because of the risk that high unemployment may cause “more persistent structural problems” if temporary joblessness becomes more permanent. While she, like Bernanke, doesn’t see any “substantial” evidence of hysteresis yet, it might occur if the labor market doesn’t heal fast enough, she said in New York.
The term hysteresis, meaning that which comes later, was used in classical physics before gaining popularity among economists to describe disenfranchised workers in periods of high unemployment, according to an entry in “An Encyclopedia of Macroeconomics” by economist Rod Cross. Referenced “occasionally” since the 1940s by Paul Samuelson, Edmund Phelps and others, it became more widely used in the 1980s, including by Olivier Blanchard and Larry Summers, Cross wrote.
Unemployment fell to 8.1 percent in April from a 26-year high of 10 percent in October 2009. That’s still far from Fed officials’ April projections of a longer-run unemployment rate of 4.9 percent to 6 percent.
“The longer this goes on, the more people will just retire or take part-time jobs,” said Quincy Krosby, a market strategist for Newark, New Jersey-based Prudential Financial Inc., which oversees $943 billion. “The Fed believes it needs to take more action because it has a jobs mandate.”
Some people joining the ranks of the long-term unemployed are only just starting their careers. David Sternesky, 26, lost his job at a public-relations company in November and has since lived on unemployment benefits. He said he tries to stay optimistic even as most of his applications are met with “silence,” sharing networking and interview tips with friends who also are struggling to find work.
‘A Little Crazy’
“It’s a little crazy that even with a four-year bachelor’s degree at a good college and a year and a half of experience, it still feels like there aren’t many jobs I’m going to be hired for,” said Sternesky, who lives in San Francisco. “But what am I supposed to do? Go to grad school and get buried in debt? It’s disheartening, but I’ve just had to dig myself out of the negative thoughts and plow through.”
Not all economists agree with Bernanke and Yellen’s view that the rise in unemployment has been caused largely by economic weakness, not structural change. Ian Shepherdson, chief U.S. economist at High Frequency Economics Ltd., said the number of openings relative to unemployment suggests that employers view the labor market as smaller than official figures suggest. That may drive wage costs higher and ultimately boost inflation as soon as next year, he said.
“The rise in job vacancies is consistent with the labor market being tighter than the headline unemployment number suggests, and if that’s right, then wages are likely to increase sooner and faster than the Fed expects,” said Shepherdson, whose company is based in Valhalla, New York. If policy makers maintain a “very bearish view of the data for longer than it’s justified by the facts, then eventually they’ll end up tightening too late and running an inflation risk.”
The Fed has an inflation target of 2 percent. The personal consumption expenditures index increased 2.1 percent in March from a year earlier.
Phelps, the 2006 Nobel-Prize winning economist, puts the natural rate of unemployment -- the level that neither accelerates nor decelerates inflation -- at about 7 percent. He said the U.S. central bank, which has a dual mandate of full employment and price stability, risks an inflation surge if it aims for joblessness of 5 percent.
“That could kind of explode in the laboratory on us,” said Phelps, director of the Center on Capitalism and Society at Columbia University in New York. It may be “hard to get expectations of inflation back down.”
Some policy makers within the Fed also argue that monetary stimulus is ineffective at creating jobs for the long-term unemployed, arguing that people who lost work during the recession don’t have the skills to qualify for positions being created in the economic expansion.
“Solutions to this problem are not amenable to monetary- policy fixes,” Charles Plosser, president of the Federal Reserve Bank of Philadelphia, told reporters May 1 in San Diego. It is neither a “precise tool” nor a “silver bullet,” and “central bankers need to be a little more humble about what it is that we can do.”
The central bank should be ready to raise interest rates even if joblessness still is higher than 7 percent, Richmond Fed President Jeffrey Lacker said May 1 at the Bloomberg Washington Summit hosted by Bloomberg Link.
So far, inflation expectations have remained in check. The break-even rate for five-year Treasury Inflation Protected Securities, the yield difference between the inflation-linked debt and comparable maturity Treasuries, was 1.96 percentage points on May 4. The rate, a measure of the outlook for consumer prices over the life of the securities, has climbed from 1.53 points on Dec. 16.
Unemployment has dropped to a three-year low after the Fed held its benchmark rate near zero since December 2008 and purchased $2.3 trillion of bonds in two rounds of so-called quantitative easing. Employers added 115,000 workers in April, the smallest gain in six months, and the jobless rate fell from 8.2 percent as people left the labor force, the Labor Department said May 4. The participation rate, the share of working-age people who have a job or are seeking one, fell to 63.6 percent, the lowest since December 1981, from 63.8 percent.
Fed officials raised their forecasts for growth at their April meeting. They now predict the U.S. will expand by 2.4 percent to 2.9 percent in 2012, up from a January projection of 2.2 percent to 2.7 percent, based on the so-called central tendency of 17 policy makers, which excludes the three highest and lowest estimates. Gross domestic product grew 2.2 percent in the first quarter.
‘Prepared to do More’
The FOMC voted at the April meeting to keep its policy unchanged, and Bernanke signaled further easing isn’t likely unless the outlook unexpectedly deteriorates. Even so, he said April 25 he’s “prepared to do more” if conditions worsen.
The economic recovery reached San Lorenzo, California, resident Ken Morrison last month, after he’d almost lost hope, he said. Morrison was laid off from his job as an operations manager selling camera equipment on EBay Inc. (EBAY) in 2007; he got a position April 30 selling jewelry and cosmetics on EBay’s online auctions.
“I did some looking initially, but since there was really nothing out there, I just gave up and semi-retired,” said Morrison, 57, who served as a volunteer assisting special-needs children until he resumed his search in January after running through his savings. “I’ve been putting off buying so many things. I’ve been living on the down-low.”
The longer the unemployment rate stays elevated, the more likely “the long-term unemployed will see their skills and labor-force attachment atrophy further, possibly converting a cyclical problem into a structural one,” Bernanke said in a March 26 speech in Arlington, Virginia.
He added that even if he’s wrong, and the problem is already structural, “we should not conclude that nothing can be done,” as it will be “even more important” to give workers the skills they need.
Barron said she recognizes the need for new skills after losing her administrative job in construction and hopes to go back to school to become a paralegal.
“That’s only once I get a full-time job” to save up for tuition, said Barron, who started working straight out of high school and never went to college. “The goal for now is to get back on my feet.”
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