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Summary US labour market has not changed in any way that makes it immune to Federal Reserve monetary policy.
According to a study released at the central bank’s summer conference, fed officials who want to the central bank to refrain from further easing have argued that the unemployment is structural, or caused by some long-lasting demographic change like poor worker job skills or lack of mobility in the labor market.Central bankers who want the Fed to take additional aggressive steps to bring down the unemployment rate believe that high unemployment is cyclical and that eventually the pattern of employment will return to what it was in the past.The study, by Edward Lazear, a professor at Stanford University and a former economist in the George W. Bush administration, comes down squarely on the side of those Fed officials pushing for more action.“The analysis in this paper and in others that we review do not provide any compelling evidence that there have been changes in the structure of the labor market that are capable of explaining the pattern of persistently high unemployment rates. The evidence points to primarily cyclic factors,” Lazear concluded.The labor market statistics continue to be grim. The unemployment rate has been above 8% for 41 consecutive months and there are five million fewer workers employed now than from the peak prior to the financial crisis and recession.In a speech opening the conference, Fed Chief Ben Bernanke called the stagnation in the labor market “a grave concern.”Most Fed watchers think the Fed is on the road toward another large round of asset purchases to try to bring down the high unemployment rate although the timing is uncertain.The Fed will meet on Sept. 12-13 to set monetary policy. Some analysts think the Fed will agree to more easing at the meeting in two weeks while others think the central bank will wait until later in the year.One of the Fed’s mandates from Congress is to foster conditions of maximum employment.Most troubling to policy makers is that the percent of people who have been unemployed for 27 weeks or longer has been above 40% since December 2009, well above the previous peak of 26% in 1983.In his paper, Lazear says that there are longer spells of unemployment in every industry compared with past recessions.The ratio of long term unemployment does not appear to be due to any structural change, “but rather to the depth of the current recession,” he concluded.Some analysts have argued that problems in the housing market may be responsible for the high jobless rates, as workers are locked into communities where jobs are absent because they can’t sell their homes.Worker mobility has declined during this recession, but the fall was primarily among renters, not home owners, Lazear found.
