Wednesday, August 18, 2010

Minneapolis Fed: Breakdown in Job Openings & Unemployment Relationship Tells of Structural Unemployment that the Fed Can't Fix

In a speech yesterday, Federal Reserve Bank of Minneapolis President Narayana Kocherlakota described a breakdown in the relationship between the job opening rate and the unemployment rate. Historically, the two rates held a close inverse relationship: as the job opening rate increased, more could find work and the unemployment rate decreased.

However, in mid 2008, the relationship began to break down. Kocherlakota stated, “The job openings rate has risen by about 20% between July 2009 and June 2010. Under this scenario, we would expect unemployment to fall because people find it easier to get jobs. However, the unemployment rate actually went up slightly over this period.”

The breakdown signals firms having job openings, and adding new jobs, but being unable to find the appropriate people to fill them. This situation, referred to as structural unemployment, occurs when those seeking work cannot fill the current job openings, typically because applicants do not possess the required skills. However, in this cycle, many seeking work may also be unable to relocate to potential job opportunities because they are underwater on their mortgage or have completed a mortgage modification, many of which require the borrower to stay in the house for a specified period of time. Additionally, some in the labor force have job opportunities which they are reluctant to accept, as the salary is below their previous pay and they are unwilling to permanently reduce their standard of living.

The breakdown in this relationship between job openings and unemployment has serious implications for our economy. Kocherlakota explained, “Were that stable relationship still in place today, and given the current job opening rate of 2.2%, we would have an unemployment rate of closer to 6.5%, not 9.5%.”

Addressing this situation is even more troubling. The Fed continues to provide an accommodative monetary policy, providing conditions for plants to hire new workers, but as Kocherlakota explained:

“..the Fed does not have a means to transform construction workers into manufacturing workers… How much of the current unemployment rate is really due to mismatch, as opposed to conditions that the Fed can readily ameliorate? The answer seems to be a lot. Most of the existing unemployment represents mismatch that is not readily amenable to monetary policy.

Read all of Kocherlakota speech here.

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