MOAR on the Ongoing Labor Market Slack Debate
First installment here…
- Shane Ferro
- Robin Harding
- Eric Rosengren
- Dean Baker
- M. Henry Linder et al.
- Ryan Avent:
- Cardiff Garcia
- John Aziz:
- Paul Krugman
Robin Harding: Overshooting and the Fed: “People are confusing two separate questions….
first, the amount of slack left in the labour market, and second, whether the Fed should deliberately try to overshoot its inflation objective of 2 per cent…. I don’t plan to go into the labour market analysis. I just want to note that regardless of whether your goal is to stabilise inflation at 2 per cent, or whether you are happy to go to 2.5 or 3 per cent first, you need an answer on the amount of slack…. My view is that there is probably still quite a lot of slack, but significant uncertainty….
A separate argument is that it does not matter how much slack there is: the Fed can just wait until it is all used up and inflation rises, because an overshoot on inflation is worth it to bring unemployment down faster…. I think this argument is wrong…. Basically all you do is set the economy up for a hard landing: bog-standard, bad monetary policy.
Eric Rosengren: Labor Market Slack and Monetary Policy: “While the unemployment rate has recently fallen to 6.6 percent,
there remain 7.3 million Americans who want full-time work but are currently working part time – a number that is dramatically higher than the 4.6 million workers in that situation in December of 2007 as the financial crisis and recession were taking hold. In contrast to the observable decline in labor force participation – which prompts a debate about whether workers remain qualified and willing to work – this “part time for economic reasons” group involves workers who currently have jobs. They have the skills to do the work, and they state that they would prefer to work full time. So these individuals likely reflect a large supply of underutilized workers – an assessment that is supported by other indicators of slack labor markets like the very low inflation rate, and very slow growth in labor compensation…
Shane Ferro: Slacktivist monetary policy: “How much slack is there in the labor market?…
Soltas divides the two economic camps into the slackers and the quitters. The slackers, including Fed chair Janet Yellen, as well as Krugman, think the economy still has a long way to go…. The quitters think there’s very little slack…. In the quitters camp is the New York Fed’s Henry Linder, Richard Peach, and Robert Rich, who in a recent paper found evidence that “the long-duration unemployed exert less influence on wages than the short-duration unemployed”…. Jared Bernstein looks at both quit rates in yesterday’s JOLTS report and short-term unemployment rates and thinks the economy still isn’t at its potential. Dean Baker says much the same thing. If you go back a decade or more, says Bernstein, neither metric is back to normal. “I don’t think an objective person would look at the end of the lines in the figure and conclude: ‘our work is done here, folks’”, he writes…
Dean Baker: Getting to Full Employment By Lowering the Goalpost: “It’s worth noting that the quit rate used to be much higher in the years before the recession,
and that was not a period associated with accelerating inflation, the normal indicator for an unemployment rate that is lower than can be sustained. In fact, at no point in the 2001 recession or subsequent period of weak employment growth did the quit rate ever fall as low as it is now. So it would take some heavy duty re-defintion to get us to be near full employment with the current labor market situation.
M. Henry Linder et al.: The Long and Short of It: The Impact of Unemployment Duration on Compensation Growth: “How tight is the labor market?…
An unusually large share of the unemployed has been out of work for twenty-seven weeks or more—the long-duration unemployed. These statistics suggest that there remains a great deal of slack in U.S. labor markets, which should be putting downward pressure on labor compensation. Instead, compensation growth has moved modestly higher since 2009. A potential explanation is that the long-duration unemployed exert less influence on wages than the short-duration unemployed…. Until the past few years, the U.S. experience has been that most fluctuations in the total unemployment rate were driven by the short-duration unemployment rate…. However, the long-duration unemployment rate rose to over 4.0 percent during 2009-10, and by December 2013 has only moved down to 2.6 percent…. Out-of-sample forecasts using short-duration unemployment track price inflation much more closely than those based on the total unemployment rate, especially during the post-2008 period….
The within-sample fit of the two models is very similar due to the two unemployment gap measures closely tracking each other during this period. The out-of-sample forecasts, however, reveal the different implications of the two unemployment gap measures. While the compensation growth series displays some volatility and both models missed the initial slowing and subsequent rebound in the series, the forecast using the short-duration unemployment gap does a better job tracking the subsequent movements in compensation growth….
If movements in the unemployment rate are largely driven by the short-duration unemployment rate, then the unemployment gap is a suitable proxy for measuring slack in the labor market—even if the appropriate measure is the short-duration unemployment gap. It is only since the last recession and its aftermath, when the composition of the total unemployment rate deviated from its historical pattern, that we can observe the differential effects of unemployment duration on compensation growth.
Ryan Avent: A Few Points on Slack: “A DEBATE has broken out over just how close America is to full employment
I recommend comments on the subject from Tim Duy and Cardiff Garcia. I’ll make a few points…. 1) The labour market is tightening, as it has for at least the last two years, but it is objectively not tight…. 2) Having said that, we are approaching the point in the business cycle at which the Fed would historically begin tightening…. 3) There is some concern that there is less slack in the American economy than we would normally expect at an unemployment rate of 6.7%…. 4) The question is, should the Fed begin tightening at this point in the slack cycle?5) Wait, that’s not the right question at all! 6) The real question is, why, nearly five years into a recovery from the worst recession of the postwar period, with labour markets looking as bad as in the worst moments of most recent recessions, with full employment another year or two away, with inflation well below the official target, and with interest rates at the zero lower bound: why is the Fed not figuring how to accelerate the recovery? 7) And then, actually, the real question is why the real question, at least where most pundits are concerned, is… (4) rather than… (6). Answer that and you have a pretty good idea why the labour-market recovery has been so awful.
8) Because one can mount a pretty good argument that when the Fed tightened at this point in previous cycles it was acting too hawkishly…. 9) But setting all of those arguments aside, the fact that the American economy is at the zero lower bound should fundamentally change the way that we approach this question…. 10) First, when an economy is stuck at the zero lower bound, the central bank can only provide further stimulus… by raising inflation expectations…. 11) Second, if the Fed tightens as it normally does so as to prevent any inflation overshooting, then it will continue the long-run downward trend in nominal interest rates…. 12) Third, and this is where things get really nasty, the Fed’s puzzling choice to behave as if nothing odd happened over the past 7 years will make it harder to provide stimulus after the economy hits the zero lower bound in the next recession….
The main point is this: we don’t know exactly how much of an output gap there is in the economy. But we have a good idea what the balance of risk looks like. When the Fed allows the economy to operate with slack for long periods of time, that translates into trillions of dollars in lost output and considerable human suffering. When the Fed overshoots on inflation there is some economic cost from relative price distortions—but when that overshooting occurs while an economy is at the zero lower bound those distortionary costs are mostly if not entirely offset by reduced probability of future output losses from inadequate monetary policy. If your moral calculator runs those numbers and concludes that the Fed should behave as it usually does so as to avoid overshooting on inflation, throw your moral calculator in the lake and buy a new one. That’s the main point.
Cardiff Garcia: Part-time problems: “Anyone who has tried to work out the extent of US labour market slack has risked getting lost in a thicket of detailed research….
A third issue is whether the persistently high share of part-time workers as a share of the labour force represents another kind of labour market slack. All three are uncertain, and there are still others. But it was the third that was the subject of Boston Fed’s Eric Rosengren’s speech on Wednesday, when he called for patience before removing monetary policy accommodation…. In our opinion Rosengren saved his strongest points for last:
Figure 10 shows the Summary of Economic Projections for inflation provided by the presidents and governors within the Federal Reserve System. The forecasts for 2013 inflation, made in 2011 and 2012, significantly overestimated how quickly inflation would return to the Federal Reserve’s 2 per cent target. The 1.1 percent inflation for 2013 was outside the range of earlier forecasts, and remains well below the 2 percent inflation target set by the FOMC….
Rosengren has a strong claim to having emerged from last week’s release of the 2008 FOMC transcripts as the Fed member with the best record of prescience that year, having argued early and forcefully that the economy was deteriorating more severely than his colleagues were recognising. He remains very much worth listening to. Every now and again, we receive a research note from a strategist or private-sector economist that “warns” of the possibility that wage growth acceleration will become a “problem” if labour market slack turns out to be tight. What they mean is that the Fed might choose to tighten policy earlier to head off the subsequent inflation that would be expected. But this is nonetheless a strange way to think. Given that compensation growth and inflation have been so anemic in recent years, an extended catch-up period before starting to tighten — “high-pressure economics” at work — would be no bad thing.
John Aziz: No, the labor market isn’t getting tight: “Workers quitting their jobs at a higher rate is taken as an expression of confidence….
What the rate of quits tells us is the rate of quits. People quit their jobs for all sorts of reasons… reading the rate of quits as a proxy for the tightness of the labor market… overlooks the bigger picture. To assess the tightness of the labor market, we need a concept of the natural rate of unemployment…
Paul Krugman: Yellen and the Labor Market: “Janet Yellen said — as we all hoped and expected she would — that she doesn’t believe that the conventional unemployment rate gives a good picture of the amount of labor market slack….
Indeed…. Compare the usually cited unemployment rate (U3) with the broadest definition, U6, a definition that includes discouraged and involuntary part-time workers….Historically, U3 and U6 have moved very much together. But currently U6 is higher than you would have expected given the decline in U3; if the pre-GR relationship still held, you wouldn’t expect U6 to be this high unless the narrower definition of unemployment was at 7.5 percent. So which is the right measure, in the sense of giving a better picture of labor market slack? We won’t know that until or unless labor markets get strong enough that wage growth begins to accelerate.
The policy implications are, however, quite clear, because the risks are asymmetric. If the Fed were to tighten soon because it thought we were nearing full employment, and it turned out to be wrong, we would be well on the way to a permanent low-inflation or even deflation trap. If it waits, inflation might tick up a bit before it sees that it has overshot, but since there are good reasons to raise the inflation target anyway, that’s not a scary prospect.