“The recovery in the labor market is far from complete,” the new Federal Reserve chairwoman, Janet Yellen, told Congress this week, adding that we shouldn’t expect the Fed to begin raising interest rates any time soon. Here’s why she’s right:
The Fed has a dual mandate from Congress to pursue maximum
employment and price stability. When unemployment is high and inflation low,
the Fed should keep interest rates low and adopt other necessary measures to,
as Yellen told lawmakers, create “financial conditions [that] support consumer
spending, business investment, and housing construction, adding impetus to the
recovery.” That’s where we’ve been since the 2008 economic and financial
crisis, which quickly turned a normal downturn into the Great Recession. The
painful legacy of that trauma remains evident in today’s
[See a collection of political cartoons on the economy.]
Let’s start with unemployment. The chart below shows the path of unemployment after the start of the recovery from each of the last four major recessions. In the current recovery (the red line), the unemployment rate has dropped substantially and now stands at 6.6 percent. But it remains higher than at this point in any previous recovery and well above where it was before the recession.
As Yellen testified,
Yellen notes two other disturbing indicators: abnormally high long-term unemployment and the large number of people who are working in part-time jobs but really want full-time work. As the chart below shows, the share of the unemployed who have been looking for work for 27 weeks or more has dropped below its peak of over 40 percent but remains substantially higher than at any time in the six decades before the Great Recession.
The long-term unemployment rate has fallen from over 4 percent. But it remains closer to its highest peak before the Great Recession (in the 1980s) than to what it would be in a normal labor market.
Besides the official
unemployment rate, which counts people as unemployed only if they’ve recently
been looking for work, the Bureau of Labor Statistics publishes other measures of labor underutilization. Its
most comprehensive alternative measure – which includes people who want to work
but haven’t looked recently and people working part time because they can’t
find full-time work – was 12.7 percent in January and has not declined to the same degree as
the official rate. By that alternative measure, about 20 million
people are unemployed or underemployed.
[See a collection of political cartoons on defense spending.]
As for inflation, Yellen noted that it ran well below the Fed’s 2 percent target last year. And while Fed policymakers expect it to eventually move back to 2 percent, they will continue to keep monetary policy very “accommodative ... well past the time that the unemployment rate declines below 6-1/2 percent, especially if projected inflation continues to run below the 2 percent goal.”
Fed critics in and out of Congress have been predicting from the git-go that the Fed’s extraordinary measures to combat the financial crisis and Great Recession – the large-scale asset purchases know as quantitative easing or QE – were a ticking inflationary time bomb. Like the 1897 report of Mark Twain’s death, however, those claims are “an exaggeration” that should not interference with efforts to restore a healthy labor market.