SLACK OR NO SLACK?
Federal Reserve Officials Tussle Over Labor Market Slack Fed Chairwoman Janet Yellen has argued consistently in recent months that labor markets are abundant with slack that will hold inflation and wages down. But she hasn’t convinced all her colleagues.
Minutes of the Fed’s April 29-30 policy meeting showed a lengthy debate on this subject and suggested labor-market slack will become an important battleground in the central bank’s coming discussions about how long to continue its low-interest-rate policies. (…)
“Some participants reported that labor markets were tight in their districts or that contacts indicated some sectors or occupations were experiencing shortages of workers,” the minutes said about the Fed’s discussions, without identifying the participants by name or specifying the number holding certain views.
The officials also discussed research challenging her view, the minutes said. For instance, Ms. Yellen has argued that the 3.5 million people out of work for six months or longer represents slack. But Princeton University professor Alan Krueger, former head of President Barack Obama‘s Council of Economic Advisers, recently co-wrote a paper with Judd Cramer and David Cho in March which argued the opposite. (…)
The view at the Fed on the broader near-term economic outlook was little changed at the meeting. Officials believed the economy was gradually picking up momentum, despite a first-quarter stumble. “Meeting participants generally indicated that their assessment of the economic outlook had not changed materially since the March meeting,” the minutes said.
Alan Krueger has a response for people, including top officials at the Federal Reserve, who doubt his research showing the long-term unemployed have been pushed to the fringes of the job market: More research.
Using a survey of households conducted by the Census Bureau between May 2008 and July 2013, the Princeton University professor finds only 22% of the people who entered long-term joblessness during the 2008 recession had gotten steady, full-time jobs by the first half of 2013. Mr. Krueger finds 35% dropped out of the labor force during that period, 28% had jobs that either weren’t steady or weren’t full-time and 14% were still looking for jobs unsuccessfully. “They are on the margins of the labor market,” Mr. Krueger said of the long-term unemployed. dropped out of the labor force during that period, 28% had jobs that either weren’t steady or weren’t full-time and 14% were still looking for jobs unsuccessfully. (…)
That March study, based on data from the Current Population Survey, found that during the period from 2008 to 2013, only 11% of people who had experienced long spells of unemployment had found steady full time work within 16 months. Of the rest, Mr. Krueger found 34% dropped out of the labor force, 25% had jobs that either weren’t steady or weren’t full-time and 30% were still out of work and looking for jobs.
The Current Population Survey used in Mr. Krueger’s earlier study tracks households for four months at a time, stops tracking them, and then returns to them eight months later. The SIPP survey followed families continuously for five years. Mr. Krueger and his coauthors explored SIPP data for a revision of their March paper.
“SIPP is not just a snapshot. It is a rolling picture of how people were doing,” Mr. Krueger said in an interview. “It reinforces what we know from the CPS. We should be more confident in what we found in the earlier version.”
Both surveys tell a similar story: The vast majority of people who entered long-term joblessness during the recession never got back on their feet. Many struggled with unsuccessful job searches, found unsteady work or dropped out of the labor force altogether.
Mr. Krueger hasn’t yet released the revised paper. In a draft shared with The Wall Street Journal, he and his coauthors also find that the longer an individual is unemployed, the greater the odds that person will drop out of the labor force. They found that 31% of people who were jobless for three months were out of the labor force within 15 months, while more than half of people unemployed for 18 months ended up out of the labor force. The revised paper argues that a stronger economy is associated with a higher job finding rate for the short-term unemployed, but has a much weaker and inconsistent relationship with job finding for the long-term unemployed.
Mr. Dudley argued Tuesday that short-term unemployed workers have done better during the early stages of the recovery, in part because employers are biased against workers who have been out of jobs for long spells. Once the supply of available short-term unemployed workers dries up with a stronger economy, Mr. Dudley said, people out of work for long spells should get more jobs and be drawn back into the labor force.
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