The headline US unemployment rate has changed little over the past few months. In January, the rate moved up a tenth of a point to 4.8 percent, still well within the range that the Fed sees as consistent with its mandate to maintain maximum employment - the "Nairu," as economists call it. As the chart shows, the rate for all workers is now close to the lows it reached during the two previous expansions.
The headline unemployment rate does not tell the whole story, however. One of the key features of the labor market during the Great Recession was the very strong rise in long-term unemployment, defined as workers who remain jobless, but continue to seek work, for 27 weeks or longer. As the next chart shows, the share of all unemployed who are out of work 27 weeks or longer remains much higher than was the case this far into previous expansions.
The median and mean duration of unemployment provide another perspective on long-term unemployment. The next chart shows that both the mean and the median remain high, and that the mean is unusually high relative to the median. The relation of the mean to the median indicates that many spells in the 27-week or longer category are, in fact, much longer.
Many observers see the persistence of long-term unemployment as a cautionary factor weighing on growth prospects over the medium term. Research suggests that people who are out of work for long periods have a harder time finding new work and end up working fewer hours and lower pay when they do find a job. Decay of skills and employer discrimination against the long-term unemployed are among the reasons often given for their lack of job market success. Researchers also note that long-term unemployment is less sensitive to changes in business conditions than short-term unemployment, suggesting that the problem is structural rather than cyclical.
Some observers dispute these conclusions, however. A recent study from the Economic Policy Institute argues that there is little sign of a skills mismatch. It concludes that the long-term unemployment do, in fact, represent a reserve of labor available to move into active employment, given adequate aggregate demand. Among other evidence, the study points to sluggish wage growth, which they take as a sign that the long-term unemployed are exerting downward pressure on wages.
It would be fair to say, though, that the interpretation of the long-term unemployed as an easily tapped labor reserve remains the minority view. If the optimists are wrong, attempts to boost aggregate demand with new spending or tax cuts is likely to put upward pressure on inflation. That, in turn, would very likely induce the Fed to speed up its program of interest rate increases.
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