In Focus: Bernanke on the Economy

March 26th, 2012 by

Federal Reserve Chairman Ben Bernanke this morning reiterated his conviction that the apparent recovery in the jobs market may be reassuring, but still leave the employment “far from where we would like to be” in a speech to the National Association of Business Economists conference taking place in Arlington, Virginia.

But Bernanke cautioned that further improvements in the jobless rate “will likely need to come from a shift to a more robust pace of hiring” rather than a decrease in layoffs. Hiring rates have seen only a “moderate improvement,” he added, further suggesting that more gains will require faster economic growth than we have recorded of late. As noted in the chart below, it will take nearly two years – at the rate of growth in the jobs market seen during February – for payrolls to reach pre-recession levels. But Bernanke appeared to indicate that this would be a bullish scenario, and that February’s rate may not be sustainable, absent a dramatic increase in economic growth.

One of the key issues that Bernanke addressed during his comments was the problem of long-term unemployment, which he noted has soared to levels “far outside the range of experience since World War II”. While long-term unemployment – lasting six months or more – never exceeded 25% during the 1981-1982 recession, it has been at 40% since December 2009. The pessimistic view of these figures, Bernanke said, is that they reflect structural problems with the jobs market, such as a mismatch between worker skills and the criteria of employers. “If that view is correct, then high levels of long-term unemployment could persist for quite a while, even after the economy has more fully recovered,” Bernanke says.

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Bernanke agreed that there are some structural elements to today’s still-high jobless numbers. Aging baby boomers who take longer to find a new job after being “downsized” may be contributing to the rise in long-term unemployment detailed in the chart above. Globalization, technological change and the loss of lower-skilled manufacturing jobs are other factors contributing to this gain. Still, Bernanke argued that “although structural shifts are do doubt important in the longer term, my reading of the research is that, at most, a modest portion of the recent sharp increase in long-term unemployment is due to persistent structural factors.”

The Beveridge Curve (discussed in this January 23, 2012 article on AlphaNow) links the number of individuals to the number of job vacancies and traditionally slopes downwards. Changes that are structural “are thought to be reflected in shifts of the Beveridge curve to the left or right,” Bernanke noted. The current shape of the Beveridge curve, depicted below, does seem to suggest an increase in the level of the mismatch between the skills of workers and those skills demanded by employers who have jobs that the need to fill.

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Bernanke’s later comments focused on reassuring economists who have been concerned about this pattern. “A more in-depth analysis of the evidence suggests that the apparent shift in the relationships between vacancies and unemployment is neither unusual for a recession nor likely to be persistent.” Rather, he argues, it may be the result of “a particularly sharp increase in layoffs”, boosting unemployment more rapidly then vacancies can respond. The prolongation of unemployment insurance – however compassionate that may be – may simply be exacerbating that pattern, Bernanke opined, as unemployed workers take their time in seeking out new jobs.

Click here to view the full text of Bernanke’s speech at the National Association for Business Economic Annual Conference as well as a slide show of his charts.

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