–Updating to Add Further Quotes and Details

By Steven K. Beckner

(MNI) – Federal Reserve Chairman Ben Bernanke made clear Monday he
does not think recent “positive” labor market signs, while “welcome,”
justify a retreat from the Fed’s easy money policies anytime soon.

Repeating his view that further significant employment gains are
likely to require faster economic growth, Bernanke did not call for
additional monetary easing, but asserted that “continued accommodative
policies” will be required.

And some of his comments could be interpreted as indicating an
openness to injecting more stimulus. More than once he stressed the need
to carefully watch incoming data, especially on long-term unemployment,
to assess whether the economy is growing fast enough to bring down
joblessness and whether lower unemployment is in turn fueling the
recovery in a virtuous circle.

Bernanke was to some extent elaborating on observations he made
during Feb. 29 testimony on his semi-annual Monetary Policy Report to
Congress, but he went well beyond in a speech prepared for delivery to
the Spring meeting of the National Association for Business Economics.

In an extended look at labor market conditions, his basic
conclusion was that the bulk of the enduring unemployment problem is
“cyclical,” not “structural” and hence should be responsive to the Fed’s
monetary countermeasures.

Bernanke’s speech was not entirely gloomy. Several times he cited
“encouraging” developments in the labor market, noting non-farm payroll
gains have averaged 250,000 per month over the last three months and
190,000 over the past 12 months, that hours worked have risen and the
official unemployment rate has fallen from 9% to 8.3%.

However, that good news was heavily qualified by the Fed chief. He
said the labor market remains “quite weak” and “far from normal,” and he
questioned whether recent improvements can be sustained in the absence
of faster GDP growth.

Recent jobs numbers, though “good news,” are “somewhat out of synch
with the overall pace of economic expansion,” Bernanke said, suggesting
the good news may well not persist.

“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,” he said.

“Of particular concern is the large number of people who have been
unemployed for more than six months,” Bernanke continued, citing the
high personal and social costs of long-term unemployment.

There is a debate on the Fed’s policymaking Federal Open Market
Committee over whether the endurance of high unemployment well past the
technical end of the recession is primarily due to “cyclical” factors,
such as insufficient aggregate demand, or “structural” factors such as a
“mismatch” between workers’ skills and employers needs.

Bernanke said that “if cyclical factors predominate, then policies
that support a broader economic recovery should be effective in
addressing long-term unemployment as well,” but “if the causes are
structural, then other policy tools will be needed.”

He said both cyclical and structural forces are involved, but
concluded that “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,” he added.

Not only is long-term unemployment high, and not only are jobs and
hours worked “well below pre-crisis peaks,” said Bernanke, but “we
cannot yet be sure that the recent pace of improvement in the labor
market will be sustained.”

Bernanke made frequent reference to Okun’s Law, which holds that
the economy must be growing at its “potential” just to hold the
unemployment rate steady and that, to reduce unemployment, the economy
must grow faster than its potential.

“More specifically … 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,” he said. “So … if the potential rate
of GDP growth is 2%, Okun’s law says that GDP must grow at about a 4%
rate for one year to achieve a 1 percentage point reduction in the rate
of unemployment.”

Most economists, at the Fed and outside the Fed, believe the
economy’s long-term trend or potential growth rate is 2.25%, but real
GDP grew less than 2.0% last year.

Hence, recent more rapid non-farm payroll gains and drops in the
unemployment rate are “a puzzle,” Bernanke said, noting that “the
decline in the unemployment rate over the course of 2011 was greater
than would seem consistent with GDP growth over that period.”

He postulated that much of the recent payroll increases may be
nothing more than a “catch-up” for heavy layoffs that occurred during
the financial crisis and recession — not a reflection of an increase in
business demand for new hires.

If that is true, then “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.”

Coupled with his determination that unemployment is primarily
cyclical, not structural, he went on, “then accommodative policies to
support the economic recovery will help address this problem as well.”

Although Bernanke has said in the past that the Fed gives
“symmetrical” attention to its “dual mandate” objectives of price
stability and maximum employment, he and most of his colleagues have put
most of their emphasis on the latter over the past few years. And
Bernanke again put unemployment at the center of his concerns in the
NABE speech.

“It will be especially important to evaluate incoming information
to assess whether the recovery is picking up as improvements in the
labor market feed through to consumer and business confidence; or,
conversely, whether the headwinds that have impeded the recovery to date
continue to restrain the pace at which the labor market and economic
activity normalize.”

Later, Bernanke said, “We must watch long-term unemployment
especially carefully … Even if the primary cause of high long-term
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.”

Calling the job market “quite weak relative to historical norms,”
Bernanke noted that “after nearly two years of job gains, private
payroll employment remains more than 5 million jobs below its previous
peak” and that “the jobs shortfall is even larger … when increases in
the size of the labor force are taken into account.”

And he noted the unemployment rate in February was still roughly 3
percentage points above its average over the 20 years preceding the

Bernanke summoned an array of arguments to minimize improvements in
the labor market beyond saying they may just reflect a “catch-up” to
past excessive lay-offs.

He discounted the contention, which some Fed officials have made,
that the decline in unemployment largely reflects a drop in labor force
participation. He said “a substantial portion of the decline in the
unemployment rate does reflect genuine improvement in labor market

But he said “a significant portion of the improvement in the labor
market has reflected a decline in layoffs rather than an increase in

Bernanke said “further improvement in the labor market will likely
need to come from a shift to a more robust pace of hiring.”

Although recent employment gains have been “catching up” with past
mass layoffs, that trend cannot continue at current rates of growth.
Real GDP grew an estimated 3% in the fourth quarter, but most economists
expect first quarter growth to be only 2%.

Philadelphia Federal Reserve Bank President Charles Plosser, among
others, has contended that lingering high unemployment is chiefly a
function of structural problems, including household and business
uncertainties about taxes and regulations and the fact that it just
takes time to deleverage and restructure balance sheets in wake of the
burst housing bubble.

These officials tend to argue that, therefore, the Fed should not
continue to pump money into the economy.

Bernanke did not totally dismiss the argument, but maintained that
they constitute “at most, a modest portion” of high long-term
unemployment. If he is wrong and “then the scope for countercyclical
policies to address this problem will be more limited.”

However, “we should not conclude that nothing can be done,” he went
on. “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.”

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