Hilsenrath on Yellen

March 31st, 2014 10:17 am | by John Jansen |

This Hilsenrath post is an excellent summary of the dovish Yellen speech:

Via the WSJ:
By Jon Hilsenrath

Federal Reserve Chairwoman Janet Yellen on Monday offered a full-throated defense of the central bank’s easy money policies in a speech in Chicago. Most importantly, she argued that there is still substantial slack in the economy, holding down inflation and giving the Fed room to keep interest rates low.

Here are her five main arguments for slack (the portion in italics are direct quotes from her remarks):

1)      PART-TIME WORKERS: One form of evidence for slack is found in other
labor market data, beyond the unemployment rate or payrolls, some of which I have
touched on already. For example, the seven million people who are working part
time but would like a full-time job. This number is much larger than we would
expect at 6.7% unemployment, based on past experience, and the existence of such
a large pool of “partly unemployed” workers is a sign that labor conditions are
worse than indicated by the unemployment rate.

2)      JOB MARKET TURNOVER: Statistics on job turnover also point to
considerable slack in the labor market. Although firms are now laying off fewer
workers, they have been reluctant to increase the pace of hiring. Likewise, the
number of people who voluntarily quit their jobs is noticeably below levels
before the recession; that is an indicator that people are reluctant to risk
leaving their jobs because they worry that it will be hard to find another. It is
also a sign that firms may not be recruiting very aggressively to hire workers
away from their competitors.

3)      WAGES: The decline in unemployment has not helped raise wages for
workers as in past recoveries. Workers in a slack market have little leverage to
demand raises. Labor compensation has increased an average of only a little more
than 2% per year since the recession, which is very low by historical standards.
Wage growth for most workers was modest for a couple of decades before the
recession due to globalization and other factors beyond the level of economic
activity, and those forces are undoubtedly still relevant. But labor market slack
has also surely been a factor in holding down compensation. The low rate of wage
growth is, to me, another sign that the Fed’s job is not yet done.

4)      LONG-TERM UNEMPLOYED: (Another) form of evidence related to slack
concerns the characteristics of the extraordinarily large share of the unemployed
who have been out of work for six months or more. These workers find it
exceptionally hard to find steady, regular work, and they appear to be at a
severe competitive disadvantage when trying to find a job. The concern is that
the long-term unemployed may remain on the sidelines, ultimately dropping out of
the workforce. But the data suggest that the long-term unemployed look basically
the same as other unemployed people in terms of their occupations, educational
attainment, and other characteristics. And, although they find jobs with lower
frequency than the short-term jobless do, the rate at which job seekers are
finding jobs has only marginally improved for both groups. That is, we have not
yet seen clear indications that the short-term unemployed are finding it
increasingly easier to find work relative to the long-term unemployed. This fact
gives me hope that a significant share of the long-term unemployed will
ultimately benefit from a stronger labor market.

5)      PARTICIPATION: A final piece of evidence of slack in the labor market
has been the behavior of the participation rate–the proportion of working-age
adults that hold or are seeking jobs. Participation falls in a slack job market
when people who want a job give up trying to find one. When the recession began,
66% of the working-age population was part of the labor force. Participation
dropped, as it normally does in a recession, but then kept dropping in the
recovery. It now stands at 63%, the same level as in 1978, when a much smaller
share of women were in the workforce. Lower participation could mean that the
6.7% unemployment rate is overstating the progress in the labor market.

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  1. One Response to “Hilsenrath on Yellen”

  2. By John M on Mar 31, 2014 | Reply

    Time after time the Fed explains that the accommodative policy has not achieved the objectives. Yet, they never explain why it should work in the modern global economy (not the 1980s!).

    Perhaps if the Fed adopted a “neutral” policy and rates were higher, the cost of labor might be less than the cost of capital. The labor markets would benefit.

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