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Federal Reserve Bank of Minneapolis Narayana Kocherlatkota Gets One Very Wrong

There is no reason to think that the bulk of current unemployment is any sense "structural": if aggregate demand were higher it would melt away just as unemployment in 1982 melted away.

There is good reason to think that if we do nothing for the next two years and unemployment remains elevated that a good deal of unemployment then will be "structural," not amenable to being cured by aggregate demand.

Fear of the transformation of current cyclical into future structural unemployment is a reason for urgent action now to boost demand--not for passivity.

Ryan Avent reports:

Monetary policy: Why isn't the Fed acting?: [A]a speech today by Minneapolis Fed President Narayana Kocherlakota suggests that some Federal Reserve voices are taking the potential for structural unemployment very seriously....

What does this change in the relationship between job openings and unemployment connote? In a word, mismatch. Firms have jobs, but can’t find appropriate workers. The workers want to work, but can’t find appropriate jobs.... Whatever the source, though, it is hard to see how the Fed can do much to cure this problem. Monetary stimulus has provided conditions so that manufacturing plants want to hire new workers. But the Fed does not have a means to transform construction workers into manufacturing workers. Of course, the key question is: How much of the current unemployment rate is really due to mismatch, as opposed to conditions that the Fed can readily ameliorate? The answer seems to be a lot.... Most of the existing unemployment represents mismatch that is not readily amenable to monetary policy.

And Ryan comments:

That's a huge statement: according to a Fed president, most of the current unemployment cannot be eliminated by monetary policy. Does this make sense? Readers won't be surprised to hear me say that while structural factors are surely causing some unemployment, it's a bit of a leap to argue that most of it can be traced to those barriers.... [I]f structural barriers were the main factor leading to high unemployment, one would expect to see an inflationary response—efforts to increase hiring above levels the economy can sustain would lead to rising wages and prices. Firms faced with too few qualified workers should be increasing salary offers. And obviously, we're not observing these trends. And listen to Mr Kocherlakota himself describe the scale of the output shortfall....

[T]his number actually understates the economic problem.... If the economy had actually grown at that [normal] rate over the past two and a half years, we would have between 7 and 8.2 percent more output per person than we do right now. My forecast is such that we will not make up that 7-8.2 percent lost output anytime soon....

In short, this is a troubling revelation. It would be useful to know whether other Fed members are thinking along similar lines. Certainly Ben Bernanke's comments have not reflected this view. But the lack of significant action from the Fed may itself speak volumes.