Banking

Although the economy has been growing for more than six quarters, "the recovery has brought little relief to the labor market," said Atlanta Fed President and CEO Dennis Lockhart in an early March speech in Tallahassee, Fla.

Speaking to the Economics Club of Florida, Lockhart detailed the vexing challenges facing the labor market. Other economic indicators, such as manufacturing output and consumer spending, have been steadily improving, but employment has lagged, he said. The U.S. unemployment rate—at 8.9 percent in February—has remained stubbornly high. The situation is improving gradually, however. For one, overall demand for workers has strengthened, and the economy has, on net, added nearly a million jobs over the last year, Lockhart said.

Long-term unemployment presents "worrying problem"
However, deep job losses during the recession and slow employment growth have contributed to the "very worrying problem" of long-term unemployment, he continued. The average unemployed person has been out of work for roughly eight months, and more than half have been seeking work for more than 20 weeks. "This situation could have negative lasting effects," he said, pointing to consequences such as reduced lifetime earnings, lower financial stability during retirement, and adverse health effects.

So why has employment been so slow to recover? The challenges in the labor markets are multifaceted, Lockhart explained. Among the frequently cited factors holding back job growth are a mismatch between job seekers' skills and those demanded by the labor market, extended unemployment benefits (which could be a disincentive to accepting job offers), and strong productivity growth. Recent research has supported some of these explanations, he said. For instance, research on the effect of long-term unemployment insurance benefits suggests that it has added between 0.4 and 1.7 percentage points to the unemployment rate. At the same time, tight credit conditions may have impeded the formation of new businesses, which are traditionally an important source of jobs.

No easy answers for employment challenges
According to Lockhart, because the challenges in the labor market are multifaceted, "the slow recovery of unemployment cannot be simply pinned on one or two causes. "The ongoing economic recovery and the associated rise in demand will help, but "it's probable that the achievable longer-run sustainable unemployment rate is a bit higher than before the recession"—about 5.5 percent according to Atlanta Fed estimates.

Plus, a further 1 to 1.5 percentage points of the unemployment rate could stem from the structural factors Lockhart detailed. Monetary policy has a role to play, too, primarily by fostering favorable economic conditions. However, he warned that "it shouldn't be expected to eliminate all the factors holding back employment growth."

March 30, 2011