Long-term Unemployment a Sign of Slack, NY Fed Economists Say – Real Time Economics

The long-term unemployed are just as much a part of the U.S. workforce as those jobless for shorter spells, and should not be discounted as policy makers try to assess much unused capacity remains, New York Fed economists write in a new blog post.

The finding counters papers by economists such as former White House adviser and Princeton University professor Alan Krueger, who argued the large numbers of workers out of a job for six months or longer would not provide a cushion against inflation because they face greater challenges in returning to work.

“The long-term unemployed should not be excluded from measures of labor market slack,” the New York Fed authors write. “If anything, the long-term unemployed group has the largest share of prime-age workers, the age group likely to have the strongest labor force attachment.”

They cite high levels of long-term unemployment in a wide range of sectors as a sign that this is an “economy-wide phenomenon, spread across industries and occupations.”

The debate is an important one for Fed policy. If the long-term unemployed are considered part of job market slack, then the Fed can wait longer than otherwise before raising short-term interest rates from near zero. Conversely, counting the long-term jobless as somehow more detached from the labor force would argue for lifting rates sooner.

The New York Fed research is fairly unequivocal in choosing sides: “It’s hard to argue that they should not be considered as part of labor market slack.”

The Fed last month concluded its latest round of bond buys and said it would likely interest rates very low for a “considerable time” longer. Many investors expect the first rate increase sometime in mid-2015.

 


 


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17 November 2014 | 7:56 pm – Source: blogs.wsj.com

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