NEW YORK – The labor markets are closer to full employment than data suggest, Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said Thursday.
Defining “maximum employment” as a level that can be sustained long-term without causing inflation, and given “inflation was distinctly higher in 2011 than in 2010” and is above the 2% target set by the Federal Open Market Committee, Kockerlakota told the Economic Club of Minnesota, “I see these changes as a signal that our country’s current labor market performance is much closer to ‘maximum employment’ than the post-World War II U.S. data alone would suggest. As I’ve argued in the past, appropriate policy should be responsive to such signals.”
Since the Great Recession, labor markets, he said, have been “less efficient,” with employers unable to fill opening readily due to skills mismatch.
Economists differ on whether this pattern is “reversible under appropriate policy,” Kocherlakota said. While the U.S. has not had a crisis of this magnitude post-World War II, he looked at data from Sweden, which in the early 1990s, “was hit by a financial, banking, and currency crisis.” Swedish labor markets behaved similarly to the U.S. and “up until now, this decline has proved to be permanent.”
The U.S. and Sweden are very different, and, Kocherlakota admitted, “It would be a mistake to conclude from the Swedish data alone that the recent decline in U.S. labor market measures is inevitably a permanent one.” There are other examples, he said, calling the Swedish data “informative.”
“At a minimum,” he said, “Sweden’s experience forces us to contemplate the possibility that the erosion in labor market performance that we’ve seen in the United States over the past five years may be highly persistent, even under appropriate monetary policy.”