So the news about inflation and GDP is in the “good, but certainly could be better” category. However, the lack of vitality in the U.S. labor market can only be termed disturbing. The national unemployment rate remains at 9.5 percent in July. Private sector job creation remains weak—only 71,000 net private sector jobs were created in July.
If one digs deeper into the data, the situation seems even more troubling. Since December 2000, the Bureau of Labor Statistics has been keeping data on the job openings rate, which is defined as the number of job openings divided by the sum of job openings and employment. Not surprisingly, when job openings rise, the unemployed can find jobs more readily, and the unemployment rate typically falls. The inverse relationship between unemployment and job openings was extremely stable throughout the 2000-01 recession, the subsequent recovery, and on through the early part of this recession.
Beginning in June 2008, this stable relationship began to break down, as the unemployment rate rose much faster than could be rationalized by the fall in the job openings rate. Over the past year, the relationship has completely shattered. The job openings rate has risen by about 20 percent between July 2009 and June 2010. Under this scenario, we would expect unemployment to fall because people find it easier to get jobs. However, the unemployment rate actually went up slightly over this period.
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.
Of course, the key question is: How much of the current unemployment rate is really due to mismatch, as opposed to conditions that the Fed can readily ameliorate? The answer seems to be a lot. I mentioned that the relationship between unemployment and job openings was stable from December 2000 through June 2008. Were that stable relationship still in place today, and given the current job opening rate of 2.2 percent, we would have an unemployment rate of closer to 6.5 percent, not 9.5 percent. Most of the existing unemployment represents mismatch that is not readily amenable to monetary policy.
His change in belief is consistent with the data. The Cleveland Fed has just released a note – Reassessing the Beveridge Curve “Shift” Four Years Later – where they argue:
Well, four years later, we have 16 more quarterly data points to inform us. The figure below plots the evolution of the Beveridge curve over the recovery so far, along with three prior business cycles. It is safe to say that what seemed like a shift in the Beveridge curve ended up being another manifestation of the “normal” dynamics of unemployment and vacancies in the United States.
The relative wide anti-clockwise loop for the 2008-09 recession is associated with the depth of the recession (there´s also a visible anti-clockwise loop in the 1981-82 recession, the deepest prior to the present one).
Pity that others, like Plosser, don´t change their long standing views about inflation despite the abundant evidence!