WASHINGTON (MNI) – Following are excerpts of a speech delivered
Monday by Richmond Federal Reserve Bank President Jeffrey Lacker to
Business and Community Leaders in Greensboro, North Carolina:

Technology, Unemployment and Workforce Development in a Rapidly
Changing World

My colleagues from the Richmond Fed and I are in the Greensboro
area for several days to meet with local business and community leaders
to learn firsthand about emerging economic issues. Trips like these
around our District are vital to our understanding of the dynamics of
economic growth. In fact, what we have heard at other events and learned
from other contacts motivates my talk with you here this evening. Before
I begin, however, I need to note that the views I express tonight are my
own and are not necessarily shared by my colleagues in the Federal
Reserve System.

In recent months, many of our business contacts have reported that
although demand is beginning to increase, they are unable to respond as
quickly as they would like due to an inability to find skilled workers.
While the need for skilled workers may seem obvious in high-tech
industries such as biotechnology or nanoscience – two industries that
have a strong presence in North Carolina – the shortage of skilled labor
appears to be more widespread. Businesses ranging from auto repair shops
to hardware stores also have reported difficulty filling open positions.

The increasing demand for skilled workers across many industries is
not a new phenomenon. Indeed, one of the first speeches I gave as
president of the Richmond Fed was right here in Greensboro in 2005 on
the subject of the effect of technology on labor markets. At that time,
I discussed the increasing gap in wages between high-skill and low-skill
workers – what economists call the “skill premium.” Between 1970 and
2000, the skill premium increased significantly, as did overall wage
inequality. By 2000, full-time workers in the 90th percentile of wages
were earning about four and a half times as much as those in the 10th
percentile, compared to three and a half times as much in 1970.

(…)

Policy Responses

What does the preceding discussion suggest about possible policy
responses to current labor market conditions? One standard option is to
increase unemployment insurance benefits in order to offset households’
loss of purchasing power. Congress routinely expands such benefits in
response to recessions, and this recession has been no exception. It’s
worth pointing out, however, that as beneficial as such insurance
programs can be, they also can affect the incentives to look for work or
accept employment offers. Thus, they may actually increase the
unemployment rate and the duration of unemployment. These potential
costs have to be weighed against our desire to help those who are
suffering from job loss. We should also keep these incentive effects in
mind when interpreting unemployment rate data. Recent estimates suggest
that between 0.8 and 1.7 percentage points of elevated unemployment may
be attributable to extended unemployment benefit programs.

It’s worth noting, by the way, that the effects of unemployment
insurance benefits together with the effects of labor market
inefficiencies could plausibly account for a quite substantial portion
of our elevated unemployment rate. The quantitative estimates of labor
market mismatch come from independent methods and datasets and, in
principle, measure conceptually distinct inefficiencies. We shouldn’t
necessarily assume these effects are additive, but combining all three
together yields a range of 2.9 to 5.9 percentage points, which is
sizable relative to the increase in the total unemployment rate of 5-
percentage points during the recession.

Another option is accommodative monetary policy in an effort to
boost aggregate spending. The Fed has kept its target for the federal
funds rate at between zero and 25 basis points since the end of 2008 and
has engaged in a variety of asset purchase programs in an effort to
provide additional stimulus to the economy. Some commentators are urging
the Fed to take additional action as long as the unemployment rate
remains elevated. But if elevated unemployment reflects largely
fundamental factors rather than insufficient spending, such stimulus
might have little impact on unemployment and instead just raise the risk
of pushing inflation up.

The notion that skills mismatch is constraining labor market
improvements suggests a third policy approach: investing in job training
and education. While perhaps not a quick resolution to the current
unemployment problem, I believe such investments are likely to yield
greater benefits for both workers and the economy as a whole than
efforts aimed at providing short-term stimulus. As I have noted,
improvement in the skill level of the workforce eventually leads to both
higher productivity and wages.

However, we should be careful to not simply throw more training
dollars at our workforce. Even relatively high levels of education are
no guarantee against workforce displacement due to technological change,
as demonstrated by the recent deterioration in incomes near the median
of the wage distribution. And to the extent that there is mismatch
within rather than across sectors, programs designed to turn former
mortgage brokers and construction workers into nurses and solar panel
installers may not get at the heart of the problem. Instead, we should
think carefully about the strategies that are likely to create the best
matches between employers and employees.

(…)

Labor Markets in a Rapidly Changing World

The unavoidable reality facing modern labor markets is the rapidly
changing world in which they function. The astonishing current pace of
technological innovation means there is always a risk that skills
demanded today will not be demanded tomorrow. But by the same token, new
skills are likely to be needed to implement the innovations that enhance
productivity and raise standards of living over time. While this
Schumpeterian process can be costly to displaced workers, the
microeconomic perspective that I have outlined tonight suggests that
additional fillips of aggregate spending are unlikely to be an effective
policy response. Sometimes, the best response to an ailing garden is not
to simply water more often; sometimes, it’s more useful to roll up your
sleeves and give each plant the water, nutrients and careful cultivation
that match its specific needs.

These emerging models of workforce development might not offer a
rapid solution to the problem of elevated unemployment, or immediate
relief to the millions of Americans who have been out of work for far
too long. Even in the best of circumstances, the process of transferring
workers to different occupations and industries takes time. But, the
future health of the labor market and the resilience of the economy as a
whole are likely to be best served by human capital investments that are
well-adapted to the diffuse, local nature of emerging economic
opportunities.

** MNI Washington Bureau: (202) 371-2121 **

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