Last April I did a post entitled “Chilling”. My conclusion then was:
So it seems that the path of NGDP is an important factor behind long-term unemployment (and the resulting number of unemployable workers). In 1973 Arthur Burns did not believe inflation was the result of expansionary monetary policy, so he geared MP to employment. In 2008, Bernanke was very much afraid of inflation taking-off. Acting on this perception the Fed tightened monetary policy to a degree not seen since 1938.
To avoid future human tragedies the Fed should concentrate efforts in stabilizing NGDP along a reasonable trend level path. If it does so it will limit the future length of unemployment and the number of ‘unemployable’ while maintaining overall macroeconomic stability.
A new Boston Fed study by Daniel Cooper: “The Effect of Unemployment Duration on Future Earnings and Other Outcomes”, is also “chilling”. From the abstract:
One of the distinguishing features of the Great Recession and its aftermath has been the spike in the number of individuals experiencing long-duration unemployment spells, defined as lasting more than 26 weeks. This paper analyzes the effect of unemployment duration on individual’s future earnings and other outcomes, such as homeownership and wealth, using data from the Panel Study of Income Dynamics (PSID). The results show a negative relationship between a worker’s most recent unemployment spell and his or her current earnings. The earnings of displaced workers do not catch up to those of their nondisplaced counterparts for nearly 20 years. The effect of unemployment on earnings is even more substantial for workers unemployed 26 weeks or more. Unemployment spells also negatively impact future homeownership—this finding suggests that the consequences of the recent spike in unemployment duration could affect more than individuals’ expected lifetime earnings.
Given the costs of long-term unemployment, policies aimed at reducing the unemployment rate—such as the Federal Reserve’s quantitative easing program—could have the added benefit of limiting the negative consequences of long-duration unemployment through fostering faster re-employment.
Policy “incrementalism” is not getting the job done. As Christy Romer indicates, a regime shift is needed.