Labor Market Healing but Difficult to Assess: Fed Chair Yellen

human capital

Although the labor market has made real strides lately, it has not yet fully recovered from the Great Recession. And assessing exactly when it is all the way back is increasingly difficult, Federal Reserve Chair Janet Yellen said in an August 22 speech at the Federal Reserve Bank of Kansas City Economic Symposium in Jackson Hole, Wyoming.

The Fed's dual mandate is to pursue maximum employment and price stability. "In this regard," Yellen said, "a key challenge is to assess just how far the economy now stands from the attainment of its maximum employment goal. Judgments concerning the size of that gap are complicated by ongoing shifts in the structure of the labor market and the possibility that the severe recession caused persistent changes in the labor market's functioning."

Economic research yields insights for next steps
The chair noted that she and her colleagues on the policymaking Federal Open Market Committee (FOMC) look to ongoing research such as that presented at the Jackson Hole conference for insights into possible changes influencing the labor market. She cautioned, though, that the FOMC's understanding of complex, fluid labor market developments and their potential effects on inflation will remain imperfect.

"As a consequence, monetary policy ultimately must be conducted in a pragmatic manner that relies not on any particular indicator or model," the chair said, "but instead reflects an ongoing assessment of a wide range of information in the context of our ever-evolving understanding of the economy."

That range of information includes judging the degree of "slack" in the labor market, or the degree to which labor resources—workers—are underused. Estimating slack requires difficult judgments about the weight of cyclical and structural factors affecting labor market variables including labor force participation, the extent of part-time employment for economic reasons, and labor market flows, such as the pace of hires and quits, Yellen said.

"A considerable body of research suggests that the behavior of these and other labor market variables has changed since the Great Recession," the chair said. "Along with cyclical influences, significant structural factors have affected the labor market, including the aging of the workforce and other demographic trends, possible changes in the underlying degree of dynamism in the labor market, and the phenomenon of 'polarization'—that is, the reduction in the relative number of middle-skill jobs."

Related Links

Related Links on Other Sites