Let’s hope Alan Krueger is wrong and Janet Yellen right

The Federal Reserve meets today while the United States unemployment rate is at 6.3%. According to the chairwoman of the Fed, Janet Yellen, there is still a significant slack in the U.S. labor force and, therefore, the Fed’s policy should remain accommodative.

But maybe that 6.3% unemployment does not reflect very well what is going on in the labor market and, for wages’ purposes, the real unemployment could be around 4.2 percent, that is, close to full employment. If that were the case, the U.S. economy would risk significant upward wages pressures that could require a tougher monetary policy.

How so? Because, according to President Obama’s former Chief Economic Advisor, Alan Krueger, the long-term unemployed are on the verge of being excluded from the labor force, and they are so desperate for jobs that their ability to press salaries up is close to zero. In other words: they will take whatever job that they can, no matter how little they are paid.

The United States Labor Department’s definition of long-term unemployment is being without a job for a minimum of 27 weeks. Currently, the number of long-term unemployed in the United States is 3.4 million, which represents a tad more than one third of the total jobless cohort. Hence, if we discount them, the unemployment rate for wage purposes is little more than 4 percent.

So far, Krueger’s theory is getting limited clout in the Fed. Not only Yellen seems to have dismissed it, but also this draft of a paperby two economist of the Federal Reserve of Richmond that was used in the Federal Open Market Committee meeting last April, according to the event’s minutes. Moody’s Analytics cofounder and chief economist agrees with the Fed. “For every evidence positing that long-term unemployment has no effect on wages, there is another one that points at the opposite conclusion”, Zandi has told thecorner.eu.

However, even if long-term inflationary pressures still remain, it must be noted that the persistence of long-term unemployment is one of the worst chapters of the current recovery. When people remain out of the labor force for some time, they lose skills, contacts and even the required psychological prowess to find a job. In a country with limited welfare support and weak family networks, such as the United States, a person who has been out of the labor market for more than a year is literally in the society’s fringes, and often just a step away from homelessness.

It is not just an American problem. In Spain —and in the rest of the Eurozone—a person becomes long-term unemployed only when he has been without job for twelve months. In spite of the tougher criteria, they represent more than half of the total unemployed in Spain, whereas in the Eurozone as a whole they are around 47.5%. That huge swathe of population risks being left behind in the recovery. For the sake of everybody, let us hope that Yellen is right and Krueger, wrong.

About the Author

Pablo Pardo
Pablo Pardo is Washington DC correspondent of El Mundo. Journalist especialized in International Economics and Politics.

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