We could scarcely believe it.At 1:36 PM ET, we got an email with this as the subject:
FED’S KOCHERLAKOTA WANTS RATE AT ZERO UNTIL 5.5% UNEMPLOYMENT
Now if you don’t know why this is so shocking, let’s go back.
Kocherlakota is Narayana Kocherlakota, and he’s head of the Minneapolis Federal Reserve. And what’s really interesting about Kocherlakota is that he used to be something of a hawk, arguing that the Fed couldn’t do much about unemployment, because the unemployment crisis was “structural” not “cyclical.”
He explained this view in an August, 2010 speech, where he said that the lack of a robust labour recovery had to do with employment “missmatch”, wherein companies had jobs to fill, but the labour force lacked the skills to satisfy those openings. If you think that’s the problem with the economy, then Fed easing doesn’t do much good.
This was the key part of that speech:
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. labour market can only be termed disturbing. The national unemployment rate remains at 9.5 per cent 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 labour 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 per cent 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.
But we’ve had two years of data since then, and a lot of work has been done on both this subject (structural vs. cyclical unemployment) and the power of the Fed.
At the recent Jackson Hole economic symposium, the conservative economist made a strong case that structural unemployment was actually a myth. Liberals and doves have argued for a while that the problem wasn’t missmatch, but rather the amount of demand in the economy, and that the labour force wasn’t facing some kind of existential issue that a strong recovery couldn’t resolve.
And now Kocherlakota seems to have come around.
The comments, to a group in Ironwood, Mich., were notable for several reasons. In his three years at the Minneapolis Fed, Mr. Kocherlakota has been seen as a “hawk”—shorthand in central-banking circles for those who worry more about inflation and generally are reluctant to pursue the easy-money policies favoured by “doves.” In 2010, he drew attention for blaming high unemployment on structural problems—such as too many out-of-work construction workers who couldn’t fill vacancies in other sectors—rather than a shortfall in demand. The Fed can’t do much about the former. Mr. Kocherlakota said he has been studying structural unemployment and sees less evidence that it is the root problem in the economy that he formerly espoused. “You have to learn from the data,” he said, and his analysis has led him to put less weight on the structural argument.
So the fact that he’s now sceptical of the structural argument and he thinks that rates should be left untra-low until unemployment hits 5.5% is quite a turn of events.
And it’s a very good sign of the robustness of the cyclical argument — which again argues that the most important thing for the labour market would be a strong recovery, rather than some kind of massive retraining — that it’s winning over converts both among hawks (like Kocherlakota) and conservatives (like Lazear).
Even more broadly than that, there’s clearly quite a zeitgeist among US central bankers that the Fed ought to try doing more to address this ongoing crisis.
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