A regional Federal Reserve Bank president thinks the sky-high U.S. unemployment rate is due in significant part to a mismatch between available positions and would-be workers able and willing to fill them.
And that mismatch means traditional Federal Reserve policy tools can do little to solve the problem.
It’s a bit of an assault on widspread notions that it’s the sluggish growth of the U.S. economy and extreme caution that slow growth generates in companies large and small that’s kept the unemployment rate hovering near 10%. Its latest reading is 9.5%.
Narayana Kocherlakota, installed in October 2009 as the president of the Federal Reserve Bank of Minneapolis, sees things differently.
The former University of Minnesoata economics professor made his intriguing points in a reasonably wonkish speech for delivery today in the Upper Peninsula of Michigan, an area that’s part of the Minneapolis Fed’s terrain. For Fed trivia buffs, the Minneapolis Fed, or the Fed’s ninth district, is the second largest by area, Kocherlakota informs us.
Back to his mismatch point. The Minneapolis Fed president cited something called the jobs openings rate, which is the number of job openings divided by the sum of jobs openings and employment.
“Not surprisingly, when job openings rise, the unemployed can find jobs more readily, and the unemployment rate typically falls,” Kocherlakota said in his speech text. The Fed official gets to vote next year on rate policy decisions of the Federal Open Market Committee.
This relationship broke down in June 2008, he said. “Firms have jobs, but can’t find appropriate workers. The workers want to work, but can’t find appropriate jobs.” It could be geography (people can’t move because they can’t sell their homes), skills or something else. But Kocherlakota said without this seemingly structural problem, the unemployment rate, at the heart of the economy’s woes, could be significantly lower.
“Were that stable relationship still in place today, and given the current job opening rate of 2.2%, we would have an unemployment rate closer to 6.5%, not 9.5%,” he said.
A very big difference. The fatalistic conclusion: there’s not much the Fed can do about this central feature of economic life. “The Fed does not have a means to transform construction workers into manufacturing workers.”
Another interesting point was Kocherlakota’s comment that a good unemployment insurance program “should offer constant benefits over the entire duration of an unemployment spell, however long. It should provide incentives only through the level of those benefits, not through their timing.”
Later on in his talk, Kocherlakota cited the “apolitical nature of the FOMC’s work,” saying disgareements were based on different economic assessments made by ”unabashed technocrats.”
Yet surely, even if economic evidence can be mustered in its favor, unemployment insurance without a time limit is a political issue. It has to be simply because of the cost of such a plan and what it says about the type of society willing to turn off the clock. Indeed, there was just a good political fight on Capitol Hill about extending benefits to 99 weeks.
Kocherlakota makes a general statement about adjusting the level of benefits can provide incentives. Some already maintain the current length of unemployment insurance might be a disincentive for some to take jobs, especially those paying signiciantly less than previous work. Could that have something to do with the jobs mismatch the Minneapolis Fed president is concerned about?