The Tale of Two Labor Markets

It was the best of times, and it was the worst of times. The differences in the message of the new Fed Chair, versus the old Fed Chair, are strikingly similar to the Dickens classic.

Janet Yellen came out with her first official statement as Chair of the Federal Reserve. And it was a dousey, basically saying everything that I’ve said about the labor market for the last two years. Some of her key highlights:

  • More than the U3 (unemployment) rate has to be used to determine the health of the labor market.
  • There’s an “unusually large fraction” of workers who have been unemployed for a long time.
  • The under-employment rate remains “very high.”

And my personal favorite talking point: that the sluggishness of job growth is insufficient to sustain economic growth overall. Myself and every other Keynesian have been shouting about this. Weak labor equals weak economy because of weak aggregate demand equals human suffering.

In other words, look for a drop in GDP.

Perhaps Yellen was looking at this data, which shows a “temporal disturbance” in the labor force?


Isn’t it interesting that when the recession “ended” is also when the long-term unemployment rate surged past all other categories for the first time in history?

Or maybe Yellen was looking at this data that shows the ratio between the “regular” unemployed and the long-term (over 6 moths) unemployed.

LTu3 ratio

If you meet an unemployed person in the supermarket, the chances are 2:1 that they are long-term unemployed. And according to the employment participation ratio, there’s a 38% chance that the person you meet in the supermarket is unemployed. Or another way to look at it is that for every unemployed person, there is an extra person 9and a quarter) that’s been unemployed for more than 6 months.

Yellen’s message is a far different message from Ben Bernanke, who after 2009, said that everything in the labor market was hunky-dory. Sure, there were lots of unemployed, but at least in the early days of the post-2008 apocalypse, Bernanke kept saying that things were getting better in the labor market. He even targeted a 6.5% U3 rate as a “benchmark” for something meaningful. Except things never actually got better for the jobless.

So is it the best of times, or the worst of times? Or WAS it the best of times under Bernanke that turned into the worse of times in the past 2 weeks? Whether you ask Wall Street or the people at the local supermarket, the answer is the same as Dickens: it depends on whom you ask. Except that we’re academics (including the Fed): we’re supposed to run on empirical evidence.

While Yellen has no idea on what to do to help the problem, even though labor is one of the Fed’s mandates, it’s at least refreshing to see some honesty about the insanity.

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