Once again, kudos to Fed chair big, bad Ben Bernanke for straight talk on the continued fragility amidst improvement in the job market. You can always get upside surprises—in fact, we’ve seen some in recent job reports—but a fair expectation is that, absent faster GDP growth than we expect to see in coming quarters, the near-term unemployment rate is more likely to wiggle around where it is than to come down much further.
One important strain of this discussion asks whether the elevated levels of unemployment that have been with us for so long have morphed from cyclical to structural. The former is the temporary impact of recession and if that’s what’s largely going on, you’d expect the jobless rate to come down once the economy finally gets back on track. The latter—structural unemployment—is a longer term problem generated by mismatch between the skills of unemployed workers and the skill demands of employers.
Bernanke argues—and I agree—that the answer is more cyclical than structural. One bit of evidence that I found pretty compelling was this figure of the probability of getting hired by duration of your jobless spell.
As you’d expect, those with longer jobless spells have a lower probability of getting hired out of unemployment. But if the structural explanation were correct, you’d expect the long term jobless—the 27+ weeks line in the graph—to have a uniquely declining likelihood of getting hired. Instead, their trend line looks much like the others.
This is not an academic distinction. Policy makers need to recognize the ongoing cyclical slack in the job market—not to write it off as a skills mismatch. Bernanke clearly gets this and his speech underscores the importance of continued monetary stimulus to build on the recent gains we’ve seen in the job market. If only his fiscal counterparts would follow suit.