Mismatch

President of the Federal Reserve Bank of Minneapolis Narayana Kocherlakota says "Most of the existing unemployment represents mismatch that is not readily amenable to monetary policy."

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.

Given the structural problems in the labor market, I do not expect unemployment to decline rapidly. My own prediction is that unemployment will remain above 8 percent into 2012. Persistently high unemployment of this kind will impose considerable losses on many of our citizens. Good public policy requires that we help mitigate their losses via a well-designed unemployment insurance program. Recent economic research, including some done at the Federal Reserve Bank of Minneapolis, shows that such a program will not feature the termination of benefits after 26, 52, or 99 weeks. Instead, a good insurance program should offer constant benefits over the entire duration of an unemployment spell, however long. It should provide incentives only through the level of those benefits, not through their timing.

That was essentially my input about the national economy in the economics go-round of the FOMC last week. GDP is growing, but more slowly than we would like. Inflation is a little low, but only temporarily. The behavior of unemployment is deeply troubling.

After the economics go-round, the FOMC meeting then transitions to its second phase, the policy go-round. Again, the 17 meeting participants have a chance to speak in turn about what they perceive to be the appropriate policy choices for the committee. We are all committed to achieving the Fed’s dual mandate to attain both price stability and maximum employment. As I mentioned, the former objective is generally understood as keeping inflation in a tight range around 2 percent. The second part of the mandate is much more of a moving target. Everyone knows that employment is shaped by many determinants beyond the Fed’s control: demographics, social custom, taxes, and so on. The Fed’s job is to keep employment as high as possible, given these other factors.

He's forecasting a weak recovery: "Based on estimates from our Minneapolis forecasting model, I expect GDP growth to be around 2.5 percent in the second half of 2010 and close to 3.0 percent in 2011. There is a recovery under way in the United States, and I expect it to continue." Sounds to me like they're looking for excuses not to do more to lower unemployment more quickly than their targets of 8.3 to 8.7 percent for 2011 and 7.1 to 7.5 percent for 2012. These were laid out in the FOMC's minutes from June. They had been revised upwards from April when they were 8.1 to 8.5 and 6.6 to 7.5, respectively.

(via Calculated Risk)