Federal Reserve Board chairman Ben Bernanke addresses the National Association for Business Economics Policy conference in Alexandria, Va., on March 26, 2012.GARY CAMERON
Ben Bernanke isn't one for personal pronouns. His tendency in public speeches is to analyze things in the third person, the ultimate show of neutrality. It's the Federal Reserve first, its chairman second.
So it's notable when Mr. Bernanke makes things personal, which he did Monday in a speech about the labour market.
A seductive explanation for the U.S.'s persistently high unemployment rate is that the conditions of the labour market have fundamentally changed. Supported by anecdotal evidence of engineering jobs going unfilled even when the unemployment rate is brushing 10 per cent, proponents of this view argue the United States is faced with a chronic skills mismatch. This matters for the Fed because no amount of monetary stimulus is going lower the unemployment rate if those unemployed workers are unqualified for the jobs on offer. In fact, if the unemployment rate is a structural problem, Fed policy might actually be doing harm by stoking inflationary pressures.
University of Chicago economist Raghuram Rajan popularized the structural unemployment hypothesis in his award-winning book Fault Lines: How Hidden Fractures Still Threaten the World Economy, published in 2010. Minneapolis Fed President Narayana Kocherlakota also has suggested that the skills mismatch explains the U.S.'s high unemployment rate.
Mr. Bernanke just doesn't buy it. He has pushed back against the structural unemployment argument consistently over the past couple of years, and no more forcefully than Monday at the annual conference of the National Association for Business Economics.
"Although structural shifts are no doubt important in the longer term, my reading of the research is that, at most, a modest portion of the recent sharp increase in long-term unemployment is due to persistent structural factors," Mr. Bernanke said.
The Fed chairman accepts that because the population is aging, and it takes older people longer to find jobs, the longer-term unemployment rate will naturally be higher now than it was a couple of decades ago. And Mr. Bernanke also acknowledges that factors such as globalization and technological change are reducing the chances of some types of workers to find jobs.
But he doubts these are the most import factors behind the U.S.'s employment problem. If unemployment is structural, rather than the result of a lack of demand, then the job finding rates of the long-term unemployed should have fallen dramatically compared with the pace at which those out of work for only a few weeks find jobs, Mr. Bernanke said. Instead, the job find rates of both groups of workers fell during the recession in roughly the same proportion.
Further, if unemployment was structural, there would be a number of industries demonstrating obvious demand for workers. Instead, there is a general weakness in hiring across the entire economy. "Counterexamples like the energy boom in the upper Midwest, where there may be some mismatch in the geographic location of suitably skilled workers or an overall shortage of potential workers with relevant skills, might best be interpreted as the exceptions that prove the rule; a mismatch story would suggest that strong labour demand would be appearing in more sectors or geographical areas by now," Mr. Bernanke said.
To conclude his argument against structural unemployment, Mr. Bernanke deployed contemporary history. Economists accept that there is a relationship between unemployment and job vacancies, measured by the Beveridge curve. It's not unusual for the Beveridge curve to reflect a change in structural factors after deep recessions. But this shift tends not to last, Mr. Bernanke said, citing the downturns of 1973-75 and 1981-82. A sharp decline in economic output likely causes employment to drop faster than posted vacancies, creating the impression of a mismatch. Employers may become more selective when demand is weak, which would boost the vacancy rate. Because workers must keep up their job search to claim unemployment benefits, they might stay in the work force longer than they would otherwise, especially when the government offers extended benefit programs. This could exaggerate any disconnect between unemployment and job openings.
"When historical experience is taken into account, these patterns do not support the view that structural factors are a major cause of the increase in unemployment during the most recent recession," Mr. Bernanke said.
Despite his efforts to play down his influence at the Fed, most observes of the central bank say Mr. Bernanke nonetheless drives the consensus. A scholar at heart, Mr. Bernanke remains open to arguments that his interpretation of the labour market is wrong. But after a couple of years of trying, no one has persuaded him differently on the structural factors. And that's why borrowing costs are ultra low.