By Steven K. Beckner

ST. LOUIS (MNI) – St. Louis Federal Reserve Bank President James
Bullard said Thursday that unemployment is “unusually high and
persistent” in the wake of the financial crisis and recession.

Bullard, a voting member of the Fed’s policymaking Federal Open
Market Committee, did not draw any monetary policy implications as he
opened a St. Louis Fed conference on “Frictions in Financial and Labor
Markets.” But the conference theme is timely as the FOMC prepares to
meet in less than two weeks to decide whether or not to provide
additional monetary stimulus.

A key issue for the FOMC will be whether further quantitative
easing can reduce unemployment from the current 9.6% and much higher if
discouraged workers and long-term unemployed are counted.

Although the National Bureau of Economic Research has declared the
recession over, Bullard said, “As one of the most traumatic of the
postwar era, this recession has left the U.S. economy with an unusually
high and persistent unemployment rate.”

“Moreover, this recession originated in especially severe financial
market turmoil,” he said, citing research showing that “recessions
associated with financial crises are more severe and require longer
recovery times.”

“However, there is no consensus on the precise nature of the
transmission mechanisms through which financial frictions translate into
more severe recessions,” he continued. “It is also not clear whether and
how weakened financial systems may hinder the recovery of output and
employment. Theories abound, to be sure, but fully satisfactory
explanations haven’t yet been developed.”

Among the issues to be decided by the FOMC is whether “QE2″ can
materially dent high unemployment. There are sharp divisions of opinion
among FOMC members.

For example, Philadelphia Federal Reserve Bank President Charles
Plosser questioned Wednesday whether high unemployment is “amenable” to
monetary measures.

The debate centers on whether unemployment is primarily structural
or due to weak aggregate demand.

Minneapolis Fed President Narayana Kocherlakota, among others, has
said there is a significant structural component to unemployment, due to
job mismatches, extended unemployment benefits and other factors that
would not be responsive to further asset purchases.

Others, such as Kansas City Fed President Thomas Hoenig and Dallas
Fed President Richard Fisher said that unemployment has stayed high
because uncertainty about taxes and regulation have made firms reluctant
to hire.

But other officials have argued that unemployment is primarily due
to insufficient demand which the Fed can do something about.

Fed Chairman Ben Bernanke addressed the issue last Friday at a
Boston Fed conference. He acknowledged structural forces but came down
largely in favor of the demand shortfall explanation for high
unemployment.

“In gauging the magnitude of prevailing resource slack and the
associated restraint on price and wage increases, it is essential to
consider the extent to which structural factors may be contributing to
elevated rates of unemployment,” he said. “For example, the continuing
high level of permanent job losers may be a sign that structural
impediments–such as barriers to worker mobility or mismatches between
the skills that workers have and the ones that employers require–are
hindering unemployed individuals from finding new jobs.”

“The recent behavior of unemployment and job vacancies–somewhat
more vacancies are reported than would usually be the case given the
number of people looking for work–is also suggestive of some increase
in the level of structural unemployment,” he added.

“On the other hand, we see little evidence that the reallocation of
workers across industries and regions is particularly pronounced
relative to other periods of recession, suggesting that the pace of
structural change is not greater than normal,” Bernanke went on.
“Moreover, previous post-World-War-II recessions do not seem to have
resulted in higher structural unemployment, which many economists
attribute to the relative flexibility of the U.S. labor market.”

“Overall, my assessment is that the bulk of the increase in
unemployment since the recession began is attributable to the sharp
contraction in economic activity that occurred in the wake of the
financial crisis and the continuing shortfall of aggregate demand since
then, rather than to structural factors,” he added.

** Market News International Washington Bureau **

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