For the unemployed and underemployed, the news from Federal Reserve Board Chair Janet Yellen’s press conference yesterday was good. Yellen, fresh from the meeting of the Federal Open Market Committee, began by telling them what they already know: jobs are still too scarce. Then she told them what they hoped to hear: she believes a “meaningful” portion of those looking for work are victims of a cyclical, rather than a structural decline in the percentage of people in the labor market.
The cyclical/structural distinction is a key question facing policymakers at the moment. The percentage of the population either working or looking for work has fallen significantly in recent years, and policymakers are struggling to understand how much of that decline is due to a struggling economy (cyclical) and how much is due to demographic and other factors unrelated to the economy (structural.)
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If the decline is more structural, then the Fed may be inclined to ease back on expansionary monetary policy sooner than it would otherwise, as it would have little effect on the employment rate. However, if the problem is that the poor economy has driven many people out of the labor force — but those people will return if things improve — then policymakers will likely keep low interest rates in place for longer in an effort to create more jobs.
On Wednesday, Yellen left little doubt as to where she and the Federal Open Market Committee, which governs U.S. monetary policy, come down on the question.
“The labor market is yet to fully recover,” she said in an opening statement. “There are still too many people who want jobs but cannot find them, too many who are working part time who would prefer full time work, and too many who are not seeking for a job but would be if the labor market was stronger.”
The FOMC, she said, believes that “there remains significant underutilization of labor resources.”
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Yellen conceded that there has been significant progress over the past few years, but said there is still room for improvement.
“Unemployment has come way down from the slightly over 10 percent level it reached, but at 6.1 percent it remains significantly above the level that most FOMC participants would regard as consistent with normal in the longer run.”
The meeting came just days after a team of Federal Reserve economists presented a paper at the Brookings Institution suggesting that a very large share of the decline in the labor force might be due to structural, rather than cyclical, effects. While the authors were clear that their findings were meant to be another data point in an ongoing discussion, their paper was seen by some as suggesting that much of the labor force participation decline is something monetary policy can’t remedy.
Yellen addressed the paper directly on Wednesday, saying it “clearly indicates…that there are structural reasons, particularly demographics but not only demographics, why labor force participation should be expected to decline over time.”
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She said that she and indeed most economists don’t even view that as a debatable point.
She added, though, that the paper found that the cyclical effects on labor force participation could be as large as one percent of the labor force — a figure that translates into millions of people. And she suggested that in her view, the remaining cyclical effects are large enough that policymakers ought to keep trying to remedy them.
“My own personal view is that there is some cyclical shortfall and something certainly probably within that range, but nevertheless it’s a meaningful cyclical shortfall,” she said.
For the jobless and underemployed, that ought to be good news, as it suggests that the Fed, for the foreseeable future, is likely to continue viewing job creation — read expansionary monetary policy — as its preferred stance.
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