He´s back with his “it´s structural” meme. Back in 2010, less than a year after becoming president of the Minneapolis Fed, Kocherlakota made a speech in which:
- He argued that unemployment was structural and
- That if the Fed Funds rate was kept at zero the appearance of deflation was only a question of time!
With regard to (1) he said:
What does this change in the relationship between job openings and unemployment connote? In a word, mismatch. Firms have jobs, but can’t find appropriate workers. The workers want to work, but can’t find appropriate jobs. There are many possible sources of mismatch—geography, skills, demography—and they are probably all at work. Whatever the source, though, it is hard to see how the Fed can do much to cure this problem. Monetary stimulus has provided conditions so that manufacturing plants want to hire new workers. But the Fed does not have a means to transform construction workers into manufacturing workers.
With regard to (2) what he meant was something like:
With the federal funds rate near zero since December 2008 and expected to remain there for the next year or two, the Fisher equation has important implications for the expected inflation rate. If the real economy is currently rebounding to a sustainable growth trend, the real interest rate will rise and the only outcomes possible will be either a higher nominal federal funds rate or a negative expected inflation rate…
The operative word is IF, and two years on we know the economy has not rebounded – climbed out of the hole into which it dropped after mid-2008.
So now Kocherlakota, to be consistent, says that:
MINNEAPOLIS (Reuters) – Unemployment may not have too much farther to fall before inflation threatens, forcing the U.S. Federal Reserve to respond by raising interest rates sooner than expected, a top Fed official said on Thursday.
The fact that inflation continues to run above the Fed’s 2-percent target, Minneapolis Fed President Narayana Kocherlakota told the Economic Club of Minnesota, is “a signal that our country’s current labor market performance is much closer to ‘maximum employment’ than the post-World War II U.S. data alone would suggest.”
The U.S. central bank’s monetary policy “should be responsive to such signals,” he said.
At least he dropped his “low interest rate-spells-deflation” sequence. And his “it´s structural” follows from his reading of the Beveridge Curve, a creation of Lord William Beveridge who wrote the Beveridge Report of 1942 which paved the way for the development of the British welfare state. The Curve establishes a negative relation between the rate of job openings and unemployment, grounded on idea that if the unemployment rate is elevated firms would find it easier to fill vacancies. If that doesn´t happen, it means that the curve is shifting up, indicating that firms have greater difficulty in filling vacancies.
This could be due to several factors, among them greater difficulty in matching workers to jobs and the persistence of long-term unemployment (which may “depreciate” human capital and/or increase “negative perceptions” about the unemployed by potential employers).
The “mismatch” view is difficult to reconcile with the observation that, with the notable exception of the Leisure & Hospitality sector, employment most everywhere is still way below the pre-recession peak, even though we´re almost three year into the “recovery”. And in no sector are wages differentially rising to indicate that labor demand outstrips supply.
Maybe the high rate of long term unemployment is the main factor behind the Beveridge Curve dynamics. Pity that the JOLTS data only begins in late 2000, so we cannot compare present behavior with that observed, for example, in the deep recession of 1981-82.
The point is that there are always “structural” elements present in the unemployment rate observed. After all, the economy is permanently in motion and all sorts of “frictions” are present. But I believe that for most situations the strength of aggregate demand will help in the adjustment process, so I´m willing to bet that in the early eighties we would not be discussing, like now, about the “structural” nature of unemployment. While between 1982 and 1985 aggregate demand grew on average 10.6%, since 2008 it has only expanded at 2.9%, barely more than half the 5.6% growth observed during the twenty years of “Great Moderation” (1987-07).
So, while in the early eighties long term unemployment averaged 18.7 between 1982 and 1985, it has averaged 35.1% since 2008, having remained above 40% for the last 28 months.
HT P. Stefani & Lars Christensen