What if the U.S. labour market never returns to “normal”?
-Kathleen Brooks is research director at forex.com. The opinions expressed are her own.-
While the investment community trudged through the snow-fogged January labour market report, the only glimmer of hope was the fall in the unemployment rate to 9 per cent from 9.4 per cent in December. But while investors grabbed that as a sign that the economic recovery in the U.S. was back on track, the data is unlikely to have cheered Federal Reserve chief Ben Bernanke.
In a speech to the National Press Club at the start of February, Bernanke indicated that he was more concerned with elevated unemployment levels than inflation. In his speech he admitted that “it will be several years before the unemployment rate has returned to a more normal level.” He added “Until we see a sustained period of stronger job creation, we cannot consider the recovery to be truly established.”
Bernanke couldn’t be clearer, it’s all about employment: if Americans aren’t back at work there is no recovery, no matter how strong the other economic indicators. Thus, January’s data leaves the door wide open for further quantitative easing and more simulative monetary policies from the Fed in the future.
For Bernanke and co at the Fed a normal rate of unemployment is considered to be around 5-5.5 per cent. But is this target now a realistic expectation? There is a very real possibility that the unemployment rate won’t fall back to 5 per cent in this economic cycle. This has serious implications not just for the American workforce but also for the way the Fed conducts monetary policy. If the structural unemployment rate has risen in the US then the Fed doesn’t need to provide so much monetary stimulus.
Research from economist Mujrat Tasci at the Cleveland Fed postulates two reasons why unemployment has been so stubborn: firstly, job-finding rates have declined sharply during this recession and secondly, the churn of workers in the economy has also deteriorated. So people can’t find a job, and those in jobs are not moving on in the current economic environment. It’s the flow of workers through an economy that helps to bring down unemployment rates and right now that isn’t happening. However, the Cleveland Fed does not believe this is a structural shift; instead it believes the unemployment rate will fall, just not in the near-term.
But the other side of this argument is far less optimistic. There has been a huge shift in the U.S. labour market partly as a result of the recession and partly due to the changing demographics of the world’s largest economy. Retiring baby boomers are going to significantly boost the oldest cohorts of the U.S. population, which will effect productivity growth. Combined with the public and private sector deleveraging that is taking place, the U.S. consumer is no longer the massive driver of employment it once was.
This has implications for business owners. If you are thinking of expanding or creating employment would you do so in an environment of sluggish growth where the majority of the population and government need to embark on some serious fiscal retrenchment in the coming years? We all know that the BRICs and the developing markets are where the exciting growth stories are happening. Emerging middle classes who are well educated and inclined to spend in China and India are stealing the spotlight from the west on the global economic stage, even if there are blips along the way like the political crisis in Egypt. But this is still where the new demand is, and where businesses are positioning themselves.
Unlocking the potential in the East will be a painful process for the West. One of the effects may be permanently higher unemployment. The only way the U.S. economy can generate jobs at the clip necessary to bring down the jobless rate is by re-positioning towards export-led growth targeting these fast-growing emerging market behemoths.
Unless this can be achieved high unemployment in the U.S. may become the new normal.