As conditions ripen for a bottom in housing in 2013, I am more frequently reviewing the on-going dynamics of the unfolding recovery in employment. The rates of unemployment and under-employment, and the wages available from employment, are the biggest wildcards in the presumed housing recovery scenario. Accordingly, I was fascinated by Federal Reserve Chairman Ben Bernanke's extensive discussion on unemployment in "Recent Developments in the Labor Market" at the National Association for Business Economics Annual Conference in Washington, D.C. (March 26, 2012).
This speech touched on some familiar themes and points. Here are the three main points I gathered from Bernanke's speech:
- Recent strength in employment may just be the long delayed "catch up" from the abnormally weak employment situation during the depths of the recession. The hopeful interpretation is that employers are expressing optimism about economic prospects.
- The economy likely soon needs to grow above trend in order to sustain recent employment gains.
- Supporting "aggregate demand", the somewhat stylized sum total of demand for everything the economy produces, will be key to generating the required economic growth.
Despite my general reservations about the Federal Reserve and its policies, I am encouraged by Bernanke's laser focus on the problem of unemployment (especially as someone who has been there). Addressing unemployment in so many other halls of government is stubbornly tainted with the non-winnable ideological struggles of politicians jostling for advantage over one another. Bernanke is free to speak from the data and offer alternative explanations for consideration.
Obviously, he has his own incentives, largely tied to his legacy, but the more transparent the data, the less this inescapable reality matters. In this particular case, Bernanke's discussion of the research on unemployment seem conclusive: the economy is at a critical juncture with respect to long-term unemployment (emphasis mine)…
Those who have experienced unemployment know the burdens that it creates, and a growing academic literature documents some dimensions of those burdens. For example, research has shown that workers who lose previously stable jobs experience sharp declines in earnings that may last for many years, even after they find new work. Surveys indicate that more than one-half of the households experiencing long unemployment spells since the onset of the recent recession withdrew money from savings and retirement accounts to cover expenses, one-half borrowed money from family and friends, and one-third struggled to meet housing expenses. Unemployment also takes a toll on people's health and may have long-term consequences for the families of the unemployed as well. For example, studies suggest that unemployed people suffer from a higher incidence of stress-related health problems such as depression, stroke, and heart disease, and they may have a lower life expectancy. The children of the unemployed achieve less in school and appear to have reduced long-term earnings prospects.
In addition, unemployment-especially long-term unemployment-imposes important economic costs on everyone, not just the unemployed themselves. Elevated unemployment strains public finances because of both lost tax revenue and the payment of increased unemployment benefits and other income support to affected families. People unemployed for a long time have historically found jobs less easily than those experiencing shorter spells of unemployment, perhaps because their skills erode, they lose relationships within the workforce, or they acquire a stigma that deters firms from hiring them. Loss of skills and lower rates of employment reduce the economy's overall productive capacity over the longer term. In the shorter term, because the process of matching the long-term unemployed to jobs typically takes more time, the currently high level of long-term unemployment might in itself be a reason that further progress in reducing the unemployment rate, and thus in achieving a more complete recovery, could be slow.
In other words, the longer-term health of the economy is at risk if high levels of long-term unemployment persist for much longer.
Bernanke believes that the employment problem is still cyclical and not yet structural:
…although structural shifts are no doubt important in the longer term, my reading of the research is that, at most, a modest portion of the recent sharp increase in long-term unemployment is due to persistent structural factors…
…the fact that labor demand appears weak in most industries and locations is suggestive of a general shortfall of aggregate demand rather a worsening mismatch of skills and jobs.
He goes on to insist that even if the problem is indeed structural,
..we should not conclude that nothing can be done. If structural factors are the predominant explanation for the increase in long-term unemployment, it will become even more important to take the steps needed to ensure that workers are able to obtain the skills needed to meet the demands of our rapidly changing economy.
Overall, I think Bernanke's unstated message to employers is that they need to increase hiring before an excessive loss of skills degrades the general labor force. This message most applies to the extent that companies are holding back on hiring that under "normal conditions" they would readily implement. Bernanke's more direct message to fiscal policymakers is that they need to actively join with the Fed in addressing the problem of long-term unemployment.
Finally, Bernanke's definitive message on monetary policy is that the Federal Reserve is prepared to do everything it can to serve as a catalyst to this entire process: monetary policy will remain very accomodative until a self-sustaining momentum clearly appears.
Until then, be careful out there!
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.