WASHINGTON (MNI) – The following is the fourth and final section of
the remarks of Federal Reserve Chairman Ben Bernanke prepared Monday for
the National Association of Business Economists:

On the usual interpretation, a recession is a period in which the
economy is moving down along the Beveridge curve; as output and the
demand for labor fall, job vacancies decline and unemployment rises. In
contrast, changes in the structural determinants of unemployment are
thought to be reflected in shifts of the Beveridge curve to the left or
right. For example, suppose that, because of changes in technology or in
the mix of industries and jobs, the mismatch between the skills of the
unemployed and the needs of employers worsens. Then, for a given number
of job openings, the number of the unemployed who are qualified for
those jobs is smaller and the unemployment rate is higher than it would
have been before the mismatch problem worsened. Graphically, an increase
in a skills mismatch would be reflected in a shift of the Beveridge
curve up and to the right.

From figure 14, we can see some outward shift in the relationship
between job vacancies and unemployment, consistent with some increase in
structural unemployment since the onset of the recession. However, a
more in-depth analysis of the evidence suggests that the apparent shift
in the relationship between vacancies and unemployment is neither
unusual for a recession nor likely to be persistent. Research has found
that during and immediately after the serious recessions of 1973 to 1975
and 1981 to 1982, the Beveridge curve also shifted outward, but in both
cases it shifted back inward during the recovery. This temporary outward
shift during a deep recession may be the result of a particularly sharp
increase in layoffs, which raises unemployment quickly, even as
vacancies adjust more slowly. Another possible explanation for a
temporary shift in the Beveridge curve is extended and emergency
unemployment insurance, which induces unemployed workers who might
otherwise consider leaving the labor force to continue searching for
work. Or employers may be more selective in hiring when their need for
workers is not pressing and take more time to fill vacancies in an
effort to find especially qualified hires. In any case, the data appear
consistent with the shift in the vacancyunemployment relationship in
recent years having been relatively modest and likely to reverse, at
least in part, as the economy recovers further. When historical
experience is taken into account, these patterns do not support the view
that structural factors are a major cause of the increase in
unemployment during the most recent recession.9

Conclusion

To sum up: A wide range of indicators suggests that the job market
has been improving, which is a welcome development indeed. Still,
conditions remain far from normal, as shown, for example, by the high
level of long-term unemployment and the fact that jobs and hours worked
remain well below pre-crisis peaks, even without adjusting for growth in
the labor force. Moreover, we cannot yet be sure that the recent pace of
improvement in the labor market will be sustained. Notably, an
examination of recent deviations from Okuns law suggests that the
recent decline in the unemployment rate may reflect, at least in part, a
reversal of the unusually large layoffs that occurred during late 2008
and over 2009. To the extent that this reversal has been completed,
further significant improvements in the unemployment rate will likely
require a more-rapid expansion of production and demand from consumers
and businesses, a process that can be supported by continued
accommodative policies.

I also discussed long-term unemployment today, arguing that
cyclical rather than structural factors are likely the primary source of
its substantial increase during the recession. If this assessment is
correct, then accommodative policies to support the economic recovery
will help address this problem as well. We must watch long-term
unemployment especially carefully, however. Even if the primary cause of
high longterm unemployment is insufficient aggregate demand, if progress
in reducing unemployment is too slow, the long-term unemployed will see
their skills and labor force attachment atrophy further, possibly
converting a cyclical problem into a structural one. If this hypothesis
is wrong and structural factors are in fact explaining much of the
increase in long-term unemployment, then the scope for countercyclical
policies to address this problem will be more limited. Even if that
proves to be the case, however, we should not conclude that nothing can
be done. If structural factors are the predominant explanation for the
increase in long-term unemployment, it will become even more important
to take the steps needed to ensure that workers are able to obtain the
skills needed to meet the demands of our rapidly changing economy.

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** Market News International Washington Bureau: 202-371-2121 **

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