WASHINGTON (MNI) – The following are the remarks of Federal
Reserve Chairman Ben Bernanke prepared Monday for the National
Association of Business Economists:
(Non-displayable graphics have been removed.)
My remarks today will focus on recent and prospective developments
in the labor market. We have seen some positive signs on the jobs front
recently, including a pickup in monthly payroll gains and a notable
decline in the unemployment rate. That is good news. At the same time,
some key questions are unresolved. For example, the better jobs numbers
seem somewhat out of sync with the overall pace of economic expansion.
What explains this apparent discrepancy and what implications does it
have for the future course of the labor market and the economy?
Importantly, despite the recent improvement, the job market remains
far from normal; for example, the number of people working and total
hours worked are still significantly below pre-crisis peaks, while the
unemployment rate remains well above what most economists judge to be
its long-run sustainable level. Of particular concern is the large
number of people who have been unemployed for more than six months.
Longterm unemployment is particularly costly to those directly affected,
of course. But in addition, because of its negative effects on workersf
skills and attachment to the labor force, long-term unemployment may
ultimately reduce the productive capacity of our economy. The debate
about how best to address long-term unemployment raises another
important question: Is the current high level of long-term unemployment
primarily the result of cyclical factors, such as insufficient aggregate
demand, or of structural changes, such as a worsening mismatch between
workersf skills and employersf requirements? If cyclical factors
predominate, then policies that support a broader economic recovery
should be effective in addressing long-term unemployment as well; if the
causes are structural, then other policy tools will be needed. I will
argue today that, while both cyclical and structural forces have
doubtless contributed to the increase in long-term unemployment, the
continued weakness in aggregate demand is likely the predominant factor.
Consequently, the Federal Reserve’s accommodative monetary policies, by
providing support for demand and for the recovery, should help, over
time, to reduce long-term unemployment as well.
Recent Labor Market Developments
As background for my discussion, let me provide a brief review of
recent job market indicators. As this audience is well aware, job
creation has picked up recently. Private payroll employment (figure 1)
increased by nearly 250,000 jobs per month, on average, in the three
months ending in February, and by about 190,000 jobs per month, on
average, over the past 12 months. At the same time, layoffs in the
public sector appear to be moderating. Together with a lengthening of
the average workweek, these employment gains have contributed to a
significant increase in aggregate hours worked (figure 2).
The increase in hours worked is encouraging, because the decline in
hours during the recent recession was extraordinary. From the peak of
this series in December 2007 to its trough in February 2010, aggregate
hours on the job by production workers fell by a remarkable 9-1/2
percent; by comparison, production-worker hours declined by gonlyh 5-
3/4 percent during the severe 1981-82 recession. Currently, hours worked
are still about 4 percent below the pre-recession peak–a clear
improvement from where we were two years ago, but still far from where
we would like to be. The government estimates payroll employment–the
number of jobs — from a survey of businesses — the establishment
survey. A monthly survey of about 60,000 households, which provides the
data needed to construct the national unemployment rate, offers an
alternative estimate of the number of jobs. Employment as estimated from
the household survey, adjusted to correspond as closely as possible to
the concept of employment measured in the establishment survey (figure
3), also shows an improvement in the labor market–indeed, by somewhat
more than in the establishment survey. I should note, however, that
month-to-month changes in this measure are much more volatile than the
employment measure from the establishment survey, which is why the
Federal Reserve puts more weight on the establishment survey for the
purposes of shortterm forecasting.
The positive signs from the labor market have shown through to
measures of labor utilization: After hovering around 9 percent for much
of last year, the unemployment rate (figure 4) has moved down since
September to 8.3 percent in February, and the share of employment
represented by people working part time for economic reasons, an
indicator of underutilization, has declined modestly. Surveys of
households and firms about their attitudes and expectations offer yet
another window on job market developments. Since the summer, household
expectations for labor market conditions over the next year have gotten
brighter (figure 5), unwinding a deterioration registered earlier last
year. Business hiring plans have also shown modest gains (figure 6).
Other indicators, such as new claims for unemployment insurance and
measures of the breadth of hiring across industries, also point to
better labor market conditions.
Notwithstanding these welcome recent signs, the job market remains
quite weak relative to historical norms, as Ifve already noted. After
nearly two years of job gains, private payroll employment remains more
than 5 million jobs below its previous peak; the jobs shortfall is even
larger, of course, when increases in the size of the labor force are
taken into account. And the unemployment rate in February was still
roughly 3 percentage points above its average over the 20 years
preceding the recession. Moreover, a significant portion of the
improvement in the labor market has reflected a decline in layoffs
rather than an increase in hiring.
This last observation is illustrated by the data on gross job flows
(figure 7). The monthly increase in payroll employment, which commands
so much public attention, is a net change. It equals the number of hires
during the month less the number of separations (including layoffs,
quits, and other separations). In any given month, a large number of
workers are being hired or are leaving their current jobs, illustrating
the dynamism of the U.S. labor market. For example, between 2001 and
2007, private employers hired nearly 5 million people, on average, each
month. Total separations, on average, were only slightly smaller. Taking
the difference between gross hires and separations, the net monthly
change in payrolls during this period was, on average, less than 100,000
jobs per month–a small figure compared to the gross flows. The recent
history of these flows suggests that further improvement in the labor
market will likely need to come from a shift to a more robust pace of
hiring. As figure 7 shows, the declines in aggregate payrolls during the
recession stemmed from both a reduction in hiring and a large increase
in layoffs. In contrast, the increase in employment since the end of
2009 has been due to a significant decline in layoffs but only a
moderate improvement in hiring. To achieve a more rapid recovery in the
job market, hiring rates will need to return to more normal levels.
The Change in Unemployment and Economic Growth: A Puzzle?
What will lead to more hiring and, consequently, further declines
in unemployment? The short answer is more-rapid economic growth. Indeed,
the improvement in the labor market over the past year — especially the
decline in the unemployment rate — has been faster than might have been
expected, given that the economy during that time appears to have grown
at a relatively modest pace. About 50 years ago, the economist and
presidential adviser Arthur Okun identified a rule of thumb that has
come to be known as Okunfs law. That rule of thumb describes the
observed relationship between changes in the unemployment rate and the
growth rate of real gross domestic product (GDP). Okun noted that,
because of ongoing increases in the size of the labor force and in the
level of productivity, real GDP growth close to the rate of growth of
its potential is normally required just to hold the unemployment rate
steady. To reduce the unemployment rate, therefore, the economy must
grow at a pace above its potential. More specifically, according to
currently accepted versions of Okunfs law, to achieve a 1 percentage
point decline in the unemployment rate in the course of a year, real GDP
must grow approximately 2 percentage points faster than the rate of
growth of potential GDP over that period. So, for illustration, if the
potential rate of GDP growth is 2 percent, Okunfs law says that GDP
must grow at about a 4 percent rate for one year to achieve a 1
percentage point reduction in the rate of unemployment.
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** Market News International Washington Bureau: 202-371-2121 **
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