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August 24, 2014 5:55 pm
Mario Draghi sat next to Janet Yellen at lunch in Jackson Hole, and when he got up to speak, he began by observing that his speech was actually rather similar to hers.
The stereotype, said Mr Draghi, is that all Europe’s unemployment is structural – and thus permanent – while all US unemployment is cyclical – and will go away as the economy recovers. The message of both central bank chiefs, he said, is that reality is more complicated.
“It’s complicated!” was pretty much the message from Jackson Hole this year. The topic of the Kansas City Fed’s conference, held against the spectacular backdrop of the Grand Teton National Park, was labour markets and the debate highlighted the depth of uncertainty about rich country job markets after years of high unemployment.
High joblessness – currently about 6.1 per cent in the US – has served to obscure other changes in the labour market, such as, for example, the number of part time jobs. This lack of clarity about the rate of full employment makes it difficult for central bankers to know when to act on interest rates
Ms Yellen, the Fed chair, raised a host of questions and offered few answers. How many people had pulled forward their retirement because of the recession? Did the decline of middle-skill occupations mean a permanent rise in part-time jobs? Is a pent-up desire for companies to cut existing wages what is holding them down today?
Knowing how far the economy is from full employment is crucial in deciding when to raise interest rates.
“Judgements concerning the size of that [employment] gap are complicated by ongoing shifts in the structure of the labour market,” said Ms Yellen.
Ben Broadbent, deputy governor of the Bank of England, said understanding job dynamics was particularly crucial for the UK, where a slump in productivity growth makes it hard to tell whether the economy is close to maximum output.
“To identify what’s supply and what’s demand you need to see data on the labour market as well,” he said.
The conference offered a wealth of analysis – much of which pulled in different directions – but the labour market focus meant fewer immediate links to monetary policy. Some past Jackson Hole papers have become landmarks in Fed debate, but there was no obvious candidate this year.
Steven Davis of the University of Chicago and John Haltiwanger of the University of Maryland presented evidence of massive declines in US labour market “fluidity” – the turnover of workers and jobs – going back to well before the Great Recession.
That could mean permanently lower employment rates and thus less potential to add jobs today. “If our assessment is correct, the US is unlikely to return to sustained high employment rates without restoring labour market flexibility,” they concluded.
In the paper with most immediate relevance for the Fed, UCLA academic Till von Wachter used new data to look at all those who spend a long period not working, rather than just those who are formally recorded as long-term unemployed.
His striking conclusion is that, in terms of this “long-term non-employment”, the Great Recession does not look much different to other recessions, such as the deep downturn in 1981.
That contrasts with fears that high levels of long-term unemployment in the past few years will lead to workers losing skills and becoming permanently jobless. Mr von Wachter’s work suggests that is less likely – and that Fed stimulus can help get the long-term non-employed back to work.
As well as the deep uncertainty about where full employment now lies, the other lesson of Jackson Hole was the diversity of labour market outcomes in different countries.
In Japan, said central bank governor Haruhiko Kuroda, the jobless situation after 20 years of deflation was at least clear, if poor, but there were unhelpful changes brought on by years of falling prices.
“Firms needed to cut wages in order to cut costs against a background of falling prices,” said Mr Kuroda. “As a result, in the past decade or so the practice of raising base wages through the ‘spring offensive’ has more or less disappeared.”
He suggested it might take some formal system to get wages rising again. “For wages to increase at an appropriate pace in the future, it is necessary to have some kind of co-ordination mechanism,” he said.
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