Evening Must-Read: Matthew O’Brien: The Fed Absolutely Shouldn’t Give Up on the Long-Term Unemployed

Matthew O’Brien: The Fed Absolutely Shouldn’t Give Up on the Long-Term Unemployed: “Are the long-term unemployed just doomed today or doomed forever?

That’s the question people are really asking when they ask if labor markets are starting to get “tight.” Now, it’s hard to believe that this is even a debate when unemployment is still at 6.7 percent and core inflation is just 1.1 percent. But it is. The new inflation hawks argue that these headline numbers overstate how much slack is left in the economy. That the labor force is smaller than it sounds, because firms won’t even consider hiring the long-term unemployed. That our productive capacity is lower than it sounds, because we haven’t invested in new factories for too long. And that wages and prices will start rising as companies pay more for the workers and work that they want. In other words, they think that the financial crisis has made us permanently poorer. That the economy can’t grow as fast as it used to, so inflation will pick up sooner than it used to—and we need to get ready to raise rates. (Notice how that’s always the answer no matter the question).

There are only two problems with this story: there’s not much evidence for it, and we should ignore it even if there is…. If tighter labor markets were causing wage inflation, they’d have caused wage inflation. But they haven’t…. Okay, but what about evidence that wages will soon start rising even if they aren’t now?… If there really is less slack than we think, we’d expect there to be more quits today than the pre-2008 trend predicts. But there aren’t….

Nobody knows how many of the people who stopped looking for work the past five years will start looking again now. Some of them retired, and won’t return. But others just went back to school or temporarily gave up looking because things seemed so hopeless—and will come back sooner or later…. Maybe these “shadow unemployed” will return as the economy returns to normalcy. And maybe that’ll keep wages from rising too much. But maybe not. Maybe the new inflation hawks are right, and companies will prefer to pay a premium for the already-employed rather than taking a chance on somebody else. Should that change the Fed’s thinking? No. Because we don’t know what will happen, and it’s worth risking a little inflation to try to get people back to work…. The long-term unemployed aren’t doomed—unless we decide that risking 3 percent inflation isn’t worth saving them.