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Minneapolis Fed's Kocherlakota Admits The Fed Is Now Powerless To Solve Unemployment Deriving From Job Mismatch
The Minneapolis Fed's recent addition, governor Kocherlakota, gave a speech in Missoula, Montana in which he noted the obvious, that GDP growth and inflation are both starting a decline which, if Goldman is right, will end up very close to breakeven to zero, and most likely will be materially lower. The one part of his speech that bears highlighting is his discussion on the ever deteriorating employment picture, which he classified as "disturbing."What Kocherlakota focuses is the topic of mismatch, which he classifies as follows: "There are many possible sources of
mismatch—geography, skills, demography—and they probably interact in
nontrivial ways." And on the topic of mismatch, the Fed governor admits that the Fed is hopeless to fix it: "The mismatch problems in the labor market do not strike me as
readily amenable to the kinds of monetary policy tools currently
available to the Fed." We wonder how long before the Fed realizes that not just the mismatch component of unemployment, but all of it, is not "amenable to monetary policy" tools, now that ZIRP is in session. And yes, fiscal policy during a time of structural unemployment can only provide temporary pull-forward boosts, such as the census and other Cash-4-Clunkers type programs. In other words, 10%+ unemployment is coming and will be here to stay.
From the relevant section in Narayana Kocherlakota speech:
The national unemployment rate remains at 9.6 percent in August. Private sector job creation remains weak—only 67,000 net private sector jobs were created in August. I do not expect the unemployment rate to decline rapidly, and so I expect it to be above 8.0 percent into 2012.
If one digs deeper into the data, the situation seems even more troubling. Since December 2000, the Bureau of Labor Statistics has been keeping data on the job openings rate, which is defined as the number of job openings divided by the sum of job openings and unemployment. Not surprisingly, when job openings rise, the unemployed can find jobs more readily, and the unemployment rate typically falls. The inverse relationship between the unemployment rate and the job openings rate was extremely stable throughout the 2000-01 recession, the subsequent recovery, and on through the early part of this recession.
Beginning in October 2008, this stable relationship began to break down, as the unemployment rate rose much faster than could be rationalized by the fall in job openings. Over the past year, the relationship has completely shattered. The job openings rate has risen by about 20 percent 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.
What does this change in the relationship between job openings and unemployment connote? The disincentive effects of extended unemployment insurance benefits are one possible cause for this change. However, I suspect that these effects are not all that large. I am comfortable with the San Francisco Fed’s 2009 estimate, which finds that the extensions of benefits have boosted the unemployment rate by 0.4 percent.
The bigger issue is mismatch. Firms have jobs, but can’t find appropriate workers. The workers want to work, but can’t find appropriate jobs. There are many possible sources of mismatch—geography, skills, demography—and they probably interact in nontrivial ways. For example, there may be jobs available in eastern Montana and western North Dakota because of the oil boom. But a household in Nevada that is underwater on its mortgage may find it difficult to move to those locations.
Of course, the key question is: How much of the current unemployment rate is really due to mismatch? The answer seems to be a lot. I mentioned that the relationship between unemployment and job openings was stable from December 2000 through October 2008. Were that stable relationship still in place today, and given the current job opening rate of 2.2 percent, we would have an unemployment rate closer to 6.5 percent, not 9.6 percent. Together with the San Francisco Fed’s estimate of the impact of benefits, this analysis implies that over 2.5 percentage points of the current unemployment rate is attributable to mismatch.
This estimate is based on a rather aggregative view of the labor market. It is important to dig deeper to get a better understanding of the problem, and there is a considerable amount of research under way exploring the quantitative importance of the various forms of mismatch. For example, the International Monetary Fund has recently released a special study based on a new state-by-state measure of the gap between demand and supply for workers with different levels of educational attainment. The study examines the impact of this variable and the foreclosure rate on state-level unemployment. It estimates that 1.5 percentage points of the national unemployment rate is due to these two sources and their interaction. Thus, according to this study, these two types of mismatch alone can account for a significant fraction of my estimate of 2.5 percentage points.
Good economic policy is about using the right tool for the problem at hand. The mismatch problems in the labor market do not strike me as readily amenable to the kinds of monetary policy tools currently available to the Fed. But they may well be amenable to other types of policy tools, like job retraining programs or foreclosure mitigation strategies. As Chairman Bernanke said in his Jackson Hole speech in August, central bankers alone cannot solve the world’s economic problems.
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well rosenberg got his answer as to where burnett/cnbc got the "patently false" acceleration job recovery figures. from obama. right in his speech and pre-tested with the koolaid cheerleader
What does this change in the relationship between job openings and unemployment connote? The disincentive effects of extended unemployment insurance benefits are one possible cause for this change.
Is this guy an idiot? Has he ever tried to live on UE? Unless you are single, and super frugal, it doesn't get you very far. Most jobs, even crappy ones, usually pay more then one could ever get on UE.
It's probably easier to live with UE checks than without them. Hence, disincentive. Not that it's any fun either way.
Upper end of UE benefits is ~$1,800/month. Full time at $7.50/hr is about $1,200/mo.
Exactly. And UE = sit on the couch, make your own meals, no stressing out under some tyrannical boss, no rush-hour fuel sucking commute, no need to own a super-reliable car, etc. Whereas, working involves so much more.
For females with kids, its pretty much a no-brainer to sit back and collect UE or welfare, along with food stamps, unless they can find a good $40-$50k job. Avoiding the cost of childcare, etc.
What are you talking about? I've heard that people on UE are having cocaine parties with super-models every night. That's why they don't all get jobs which are countless and easy to land.
Of course I've also heard that the moon is made of green cheese.
If only the FED had done it's damn job - take the punch bowl away before it's too late. Let recessions happen, creative destruction is good for the economy. The longer they wait, the worse the crash will be. But at this point does it matter if the world economy takes 5 bullets to the head or 20?
The mismatch problems in the labor market do not strike me as readily amenable to the kinds of monetary policy tools currently available to the Fed.
No shit ....
http://www.youtube.com/watch?v=FTeWGD4Q9T4
What are the ex- real estate agents and mortgage brokers going to do? Most of those jobs are never coming back.
You mean they can't be re-trained for infrastructure work...building runways & highways?
Who's runnin this railroad? ;-)
You better have a Union card or all infrastructure jobs are off limits. Do not forget that achieving diversity on shovel ready jobs is more important than the job.
Join a Union or seek out a same sex partner. If you are a heterosexual white male you do not have a chance in hell.
"If you are a heterosexual white male you do not have a chance in hell."
Or apparently, a heterosexual black male, judging by the stats.
They appear to be equal opportunity offenders. All that counts for them is power blocs, people really need to understand this.
It truly is us, all of us, against them.
convert to judaism?
As Chairman Bernanke said in his Jackson Hole speech in August, central bankers alone cannot solve the world’s economic problems.
But they can cause a whole hell lot of them.
+1 HAHAHAHAHAAAAAA!
It's funny because it's true.
Didn't Bush do this? Or was it Waldo?
SNAP at 41.3 Million....in other words +13% of the population is on food stamps....says it all.
I wonder if there's already a black market going on in foodstamps just like in Cuba :)
there is...my wife is a teacher and an assistant at her school buys the debit cards from people on foodstamps so they can use the cash to pay their electric bill, iphone etc.
The money is also used for illegal drug purchases. In the early 90's, 20-25 cents per dollar was the going rate. This was when the stamps had different denominations and could be spent like cash,
I have no idea how the system works today.
And the interesting thing is that now that food stamps are "paid" via an ETF card, there is much less social stigma from using them. Most grocery stores can electronically sort out what is eligible with what's not. So you swipe with one card to use the "stamps" and then use cash, debit or credit to pay the rest.
I was behind someone yesterday who did precisely this with no embarrassing "stamps" or anyone knowing what was happening. I caught on because I was watching carefully. Others around me didn't see anything out of the ordinary.
No more messy stepping over the homeless in the streets or waiting behind someone fumbling with "stamps".
And its sad as hell as many people of all stripes are heading in this direction.
I can't imagine how that must feel. I bet you cry yourself to sleep every day when you're faced with something like that.
Especially if they already know you for years.
But it does not have to be a permanent situation. Tough at first, but then you pick yourself up and get moving forward.
It probably doesn't feel like anything, that's the whole point. You swipe your plastic to buy food just like everybody else. Whatever incentives you may feel compelled by to get off food stamps, social stigma is no longer one of them. Hell, why would anybody say no to food stamps? I'm pretty damn sure I'll never get back what I paid for government in any way, shape or form...sign me up!
I don't want to go around jumping to conclusions or anything but it is a fact that we have record high food welfare and record high obesity.
Only in America.
Ding! Ding! Ding! Give the man a stuffed animal from the top shelf!
The problem is that we have removed all stigma from the entitlements.
IMO, a little shame is a great motivator.
Well, it feels like nothing until you get the clueless 15 year old at the cash register that doesn't know how to process the food stamp transaction, and yells for the supervisor to come over. I've seen it happen. I still don't know if the situtation was enough to embarass the person since it's free food at taxpayer expense.
high fructose corn syrup, transfats, and other garbage are now an international problem, welcome to planet girth.
I didn't know the Feds job was to solve the unemployment problem. I thought their job was to print money, Buy stocks and fuck us shorts up the cooloo
mismatch ? how about tyrannical government oppression. how about a community organizer and pelosi/reid/dodd destroying a superpower with 2500 pg unread legislation written by soros and special interest groups. how about hijacking healthcare and the financial systems.
what planet are these guys on? Employment mismatch? Obama Executive Order #1 - build 50 nuclear power plants tomorrow. EO #1a - We are dropping all regulatory and environmental preconditions prior to construction.
Obama Executive Order #2 - Drill baby, drill. and ditto above for preconditions.
Hey, I don't have a Dhp in economics.
Who are the fake "Fed"?
http://www.iamthewitness.com/books/Andrew.Carrington.Hitchcock/The.Histo...
great book and site!
"...central bankers alone cannot solve the world’s economic problems."
Should read - Central bankers are central to the world's economic problems.
IMHO.
"...central bankers alone cannot create the world's economic problems." But they are damn sure ahead of whomever is in second place.!
About time somebody figured out that "jobs" are not fungible, and that financial analysts for the most part can't build roads and runways, nor can house framers suddenly become institutional equity traders, though the latter has a higher probability of success than the former. In addition, the crappy housing markets in many of the source geographies act as a drag on relocation (e.g. the sell side) even where a suitable target job exists elsewhere.
A parting shot from "The Hunt for Red October":
Konovalov Crewman: Torpedo, Dead Ahead!
[just moments later, the Konovalov explodes.]
Is Kocherlakota saying that printing money isn't a solution (for anything in the real world)? Throw the money changers out of the temple.
Where do they get the data used in the "jobs opening data"?
monster.com
fitting...
In a past life I was a headhunter in the IT space. I've seen this mismatch for over 10 years. It's real. Many US IT workers were simply unwilling to relocate for good work. So we filled LOTS of positions (contract and perm) with H1Bs and GCs. They were willing to be flexible, and typically did not have a home to sell.
The poor real estate market will not help matters now. However, for workers who are willing and able to be transient, there is income to be had.
Government may be full of crap, but we're not totally helpless.
I have no facts to back this up, but I would not be surprised if the state of the real estate market is creating a magnafication of this geographic mismatch. In times past, people could sell their home, pocket some $$$ and move to another location to get a better job.
You're correct. However, I was often amazed by how many choice opportunities were turned down simply because they were unwilling to relocate.
The employment arena has accelerated and the winners are the nimble ones.
I'm telling my 22 year-old son (bio-chem & math major) of the virtues of a nimble mindset, reduced personal possessions, and no debt.
Those "choice opportunities" were probably posted by Foxconn.
Very few new grads over the past decade have been hired in IT. New grads, almost universally, do not own houses, or have strong attachments to a particular area. H1-B's and GC holders disproportationaly are in entry-level positions, which they can obtain because they have a reputation of working for below-market wages. Your claims of US IT workers, as a group, being inflexible, simply does not stand up to scrutiny.
Nothing a new macro in excell won't solve...
We get nothing but BS dog ate my homework excuses from this Fed. Job mismatch is
a part of every job market. It is often caused by jobseekers and employers not willing
to bear the cost of education and training because ROI is too uncertain. In an era of
globalization, job mismatch is certain to increase. Corporations that are smart and invest
in human capital for the long term will not have a problem. They will always have a pool
of talent waiting on the bench. Most American companies have become bottom feeding
opportunists looking for marginal low wage workers. They reap what they sow.
The Dog ate the beige book and crapped out some numbers. They kind of look shitty but who cares right? :)
And Kensians used to crow that 70% of the
American Economy was retail i.e. Selling stuff,
not making it. Need to boost the economy? Hey,
no problem, just print more money and 70%
of the Economy will boom. What sort of stupid
dribble does it take toget a Nobel Award for
Economics???
The same sort of stupid dribble it takes to get one in Peace?
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I’m the smiling face on your t.v.
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Like joseph stalin and gandi
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I am the only one that is seriously urked by the word currently or am I reading too much into it.
The only mismatch that matters here is the desired outcome of prosperity/GDP growth with the tremendous wall of disincentives and uncertainty the government has built up in front of individuals and (particularly smaller) businesses which are the only interested parties that can ever make those desired outcomes happen.
I am not seeing a mismatch....My field remains inconceivably hot....I have degrees in safety, industrial hygiene and business....Now you'd think, with all the jobs shipped to china and elsewhere, that I'd run into a dearth of job offerings...No, there's jobs everywhere in my field....I haven't been hired yet....Could be my age. Could be a myriad of things.
There are jobs, yes... But there were 1500 applicants.
Mismatch? Yeah right. What most people are experiencing is job requirement inflation, or simply, employers being really uninterested in hiring and paying market rates.
For instance, in IT, many employers advertise things like, "Must have 10 years of experience in Windows Server 2008 R2", and then complain ad nauseum that they can't find anyone. They end up filling the position with a H1-B, even when they receive hundreds, if not thousands of resumes from Americans who are perfectly qualified to work in the position if the requirements weren't actually bogus.
[The bigger issue is mismatch. Firms have jobs, but can’t find appropriate workers. The workers want to work, but can’t find appropriate jobs.]
Shit..problem solved! Move you morons! Oh, can't sell your house or get a loan.
Bummer.
Move to China. Oh, they won't take you.
Bummer
Why not address unemployment for what it really is? Wage missmatch....
Lets assume that someone is laid off making $40K. For most fields, would their employer hire them back if they paid them only $25K? Absolutely.... Which brings you to what unemployment is. It is what someone "thinks" they are worth versus what the market is willing to take. One can think of it as a supply and demand on a global scale....
Most of the layoffs over the past decade have not been a matter of employers trying to reduce $40k salaries down to $25k, but rather, employers reducing $50-$60k salaries down to $5k/year by outsourcing everything to China or India.
In IT, its fairly typical to hire a H1-B for 1/3rd of what an equivalent American would earn. And no wrongful dismissal lawsuits to boot once they're no longer needed.
With your criticism, all you idiots are literally missing this rally! Bunch of bozos...
I've got it! I'll buy AAPL with my Visa!
Down YTD...down over 30 days...helluva rally brownie ;-)
... after they have successfully created them all by themselves in the first place.
Nice article thanks.
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