We’ve heard this before but we need to hear it again. Today the message comes from Charles Evans, president of the Chicago Federal Reserve Bank. “A number of labor market issues… lead me to think this accommodation will likely be appropriate for some time,” he said in prepared remarks delivered at a speech in Washington. In other words, the central bank will keep interest rates low for the foreseeable future. The lack of job growth is the main catalyst. How long will this last? “I think six months is a good time period to say I think we’ll have accommodative policy like we have today.”
If this is what passes for optimism, and arguably it is, there’s a case for thinking that the crowd needs to recalibrate its expectations. Indeed, there’s more at stake than speculating on when the price of money will rise. Low rates this time are a reflection of structural problems in the economy, and even looking out six months doesn’t necessarily change all that much, even if rates start to move higher by that point. Evans laid out the ugly details in his talk today:
The rise in long-term unemployment may have ramifications for the economy going forward. The likelihood of finding a job tends to decline as an individual remains out of work for a longer period. Partly this reflects the fact that those who typically have a difficult time finding work will tend to be unemployed longer. In this case, longer spells are a symptom rather than the source of an underlying problem. However, a long unemployment spell could itself cause deterioration in a worker’s skills, leaving some of the long-term unemployed with less bright job prospects even as the economy begins to revive. This could contribute to high average unemployment duration for some time.
One of the smoking guns for thinking this is the future that awaits comes by way of the duration of unemployment. “In February,” Evans explains, “over 40% of the unemployed were in the midst of a spell lasting more than six months, by far the highest proportion in the post-World War II era.”
The trend of rising duration this time around was graphically shown in a chart Evans used in his talk, which is reproduced below. The graph plots the jobless rate (horizontal bar) vs. the average length, or duration, of unemployment since 1947. The basic trend is that duration rises as the unemployment rate increases. When the Great Recession began, the jobless rate was roughly 5% and duration was around 17 weeks. In other words, we began the current contraction in a weakened state that was substantially worse than usual. And it’s deteriorated ever since.
Indeed, the red dots in the chart above show the monthly statistics for 2008 and 2009. The bottom line: the jobless rate and the average length of unemployment are at the highest in more than 60 years. This is disturbing for obvious reasons, along with some not-so obvious ones. As Evans said, “The likelihood of finding a job tends to decline as an individual remains out of work for a longer period.” The not-so-astonishing implication:
…long-term unemployment tends to lead to permanent earnings losses, particularly for those who have previously invested heavily in job- or industry-specific skills. So, high unemployment durations could have long-lasting effects on consumer confidence and demand.
In other words, there’s a heightened risk “that the recovery in labor markets could be slow even as output returns to a well-established growth path,” he said.
You didn’t necessarily hear it here first, but rarely has the warning been so loud and clear from the central bank’s upper ranks.