Ben S Bernanke: Recent developments in the labor market
Speech by Mr Ben S Bernanke, Chairman of the Board of Governors of the Federal Reserve
System, at the National Association for Business Economics Annual Conference,
Washington DC, 26 March 2012.
* * *
My remarks today will focus on recent and prospective developments in the labor market. We
have seen some positive signs on the jobs front recently, including a pickup in monthly
payroll gains and a notable decline in the unemployment rate. That is good news. At the
same time, some key questions are unresolved. For example, the better jobs numbers seem
somewhat out of sync with the overall pace of economic expansion. What explains this
apparent discrepancy and what implications does it have for the future course of the labor
market and the economy?
Importantly, despite the recent improvement, the job market remains far from normal; for
example, the number of people working and total hours worked are still significantly below
pre-crisis peaks, while the unemployment rate remains well above what most economists
judge to be its long-run sustainable level. Of particular concern is the large number of people
who have been unemployed for more than six months. Long-term unemployment is
particularly costly to those directly affected, of course. But in addition, because of its negative
effects on workers' skills and attachment to the labor force, long-term unemployment may
ultimately reduce the productive capacity of our economy. The debate about how best to
address long-term unemployment raises another important question: Is the current high level
of long-term unemployment primarily the result of cyclical factors, such as insufficient
aggregate demand, or of structural changes, such as a worsening mismatch between
workers' skills and employers' requirements? If cyclical factors predominate, then policies
that support a broader economic recovery should be effective in addressing long-term
unemployment as well; if the causes are structural, then other policy tools will be needed. I
will argue today that, while both cyclical and structural forces have doubtless contributed to
the increase in long-term unemployment, the continued weakness in aggregate demand is
likely the predominant factor. Consequently, the Federal Reserve's accommodative
monetary policies, by providing support for demand and for the recovery, should help, over
time, to reduce long-term unemployment as well.
Recent labor market developments
As background for my discussion, let me provide a brief review of recent job market
indicators. As this audience is well aware, job creation has picked up recently. Private payroll
employment (figure 1) increased by nearly 250,000 jobs per month, on average, in the three
months ending in February, and by about 190,000 jobs per month, on average, over the past
12 months. At the same time, layoffs in the public sector appear to be moderating. Together
with a lengthening of the average workweek, these employment gains have contributed to a
significant increase in aggregate hours worked (figure 2).
The increase in hours worked is encouraging, because the decline in hours during the recent
recession was extraordinary. From the peak of this series in December 2007 to its trough in
February 2010, aggregate hours on the job by production workers fell by a remarkable
9-1/2 percent; by comparison, production-worker hours declined by "only" 5-3/4 percent
during the severe 1981-82 recession. Currently, hours worked are still about 4 percent below
the pre-recession peak - a clear improvement from where we were two years ago, but still
far from where we would like to be.
The government estimates payroll employment - the number of jobs - from a survey of
businesses - the establishment survey. A monthly survey of about 60,000 households, which
provides the data needed to construct the national unemployment rate, offers an alternative
estimate of the number of jobs. Employment as estimated from the household survey,
adjusted to correspond as closely as possible to the concept of employment measured in the
establishment survey (figure 3), also shows an improvement in the labor market - indeed, by
somewhat more than in the establishment survey. I should note, however, that
month-to-month changes in this measure are much more volatile than the employment
measure from the establishment survey, which is why the Federal Reserve puts more weight
on the establishment survey for the purposes of short-term forecasting.
The positive signs from the labor market have shown through to measures of labor utilization:
After hovering around 9 percent for much of last year, the unemployment rate (figure 4) has
moved down since September to 8.3 percent in February, and the share of employment
represented by people working part time for economic reasons, an indicator of
underutilization, has declined modestly.
Surveys of households and firms about their attitudes and expectations offer yet another
window on job market developments. Since the summer, household expectations for labor
market conditions over the next year have gotten brighter (figure 5), unwinding a
deterioration registered earlier last year. Business hiring plans have also shown modest
gains (figure 6). Other indicators, such as new claims for unemployment insurance and
measures of the breadth of hiring across industries, also point to better labor market
conditions.
Notwithstanding these welcome recent signs, the job market remains quite weak relative to
historical norms, as I've already noted. After nearly two years of job gains, private payroll
employment remains more than 5 million jobs below its previous peak; the jobs shortfall is
even larger, of course, when increases in the size of the labor force are taken into account.
And the unemployment rate in February was still roughly 3 percentage points above its
average over the 20 years preceding the recession. Moreover, a significant portion of the
improvement in the labor market has reflected a decline in layoffs rather than an increase in
hiring.
This last observation is illustrated by the data on gross job flows (figure 7). The monthly
increase in payroll employment, which commands so much public attention, is a net change.
It equals the number of hires during the month less the number of separations (including
layoffs, quits, and other separations). In any given month, a large number of workers are
being hired or are leaving their current jobs, illustrating the dynamism of the U.S. labor
market. For example, between 2001 and 2007, private employers hired nearly 5 million
people, on average, each month. Total separations, on average, were only slightly smaller.
Taking the difference between gross hires and separations, the net monthly change in
payrolls during this period was, on average, less than 100,000 jobs per month - a small
figure compared to the gross flows.
The recent history of these flows suggests that further improvement in the labor market will
likely need to come from a shift to a more robust pace of hiring. As figure 7 shows, the
declines in aggregate payrolls during the recession stemmed from both a reduction in hiring
and a large increase in layoffs. In contrast, the increase in employment since the end of 2009
has been due to a significant decline in layoffs but only a moderate improvement in hiring. To
achieve a more rapid recovery in the job market, hiring rates will need to return to more
normal levels.
The change in unemployment and economic growth: a puzzle?
What will lead to more hiring and, consequently, further declines in unemployment? The
short answer is more-rapid economic growth. Indeed, the improvement in the labor market
over the past year - especially the decline in the unemployment rate - has been faster than
might have been expected, given that the economy during that time appears to have grown
at a relatively modest pace. About 50 years ago, the economist and presidential adviser
Arthur Okun identified a rule of thumb that has come to be known as Okun's law. That rule of
thumb describes the observed relationship between changes in the unemployment rate and
the growth rate of real gross domestic product (GDP). Okun noted that, because of ongoing
increases in the size of the labor force and in the level of productivity, real GDP growth close
to the rate of growth of its potential is normally required just to hold the unemployment rate
steady. To reduce the unemployment rate, therefore, the economy must grow at a pace
above its potential. More specifically, according to currently accepted versions of Okun's law,
to achieve a 1 percentage point decline in the unemployment rate in the course of a year,
real GDP must grow approximately 2 percentage points faster than the rate of growth of
potential GDP over that period. So, for illustration, if the potential rate of GDP growth is
2 percent, Okun's law says that GDP must grow at about a 4 percent rate for one year to
achieve a 1 percentage point reduction in the rate of unemployment.
In light of this historical regularity, the combination of relatively modest GDP growth with the
more substantial improvement in the labor market over the past year is something of a
puzzle. Resolving this puzzle could give us important insight into how the economy is likely to
evolve. To illustrate the tension, consider the relationship between the recent changes in the
unemployment rate and in real GDP relative to the predictions of Okun's law (figure 8). As
illustrated by the position of the square labeled "2011" relative to the Okun's law relationship,
represented by the line, the decline in the unemployment rate over the course of 2011 was
greater than would seem consistent with GDP growth over that period. Indeed, with last
year's real GDP growth below 2 percent, less than what most economists would estimate to
be the U.S. economy's potential rate of growth, one might have expected little change in the
unemployment rate last year or even a slight increase. What is this confluence of the
significant decline in the unemployment rate and the modest recent increase in real GDP
telling us about the state of the economy, and how will the Okun's law puzzle be resolved?
The apparent failure of Okun's law could reflect, in part, statistical noise. For example, it may
be that future data revisions will show that real GDP grew more quickly over the past year
than currently estimated. However, although it is certainly possible that revised data will
ultimately explain part of the puzzle, at this point we have no specific evidence suggesting
that such a revision might be in the offing. For example, gross domestic income, an
alternative measure of economic activity constructed using source data that are mostly
different from the data used in estimating GDP, provides some check on the information
provided by the better-known GDP measure. However, gross domestic income is currently
estimated to have increased less quickly than GDP in 2011 and so does not point to an
explanation of the drop in the unemployment rate.
Another logical possibility is that the decline in the unemployment rate could be overstating
the improvement in the job market. For example, potential workers could be giving up on
looking for work to an unusual extent. Because a person has to be either working or looking
for work to be counted as part of the labor force, an increase in the number of people too
discouraged to continue their search for work would reduce the unemployment rate, all else
being equal - but not for a positive reason. A story centered on potential workers dropping
out of the labor force might seem in line with the low level of the labor force participation rate
(figure 9). But other data cast doubt on that idea. For example, a broad measure of labor
underutilization that includes people only marginally attached to the labor force has declined
about in line with the unemployment rate since late 2010 (figure 10).1 On balance, an
assessment of a broad range of indicators suggests that a substantial portion of the decline
in the unemployment rate does reflect genuine improvement in labor market conditions.
Yet another interpretation of the recent improvement is that it represents a catch-up from
outsized job losses during and just after the recession. In 2008 and 2009, the decline in
payrolls and the associated jump in unemployment were extraordinary. In particular, using
the Okun's law metric, the run-up in the unemployment rate in 2009 appears "too large"
relative even to the substantial decline in real GDP that occurred. This point can be seen by
returning to figure 8, which shows the Okun's law relationship. The open triangle labeled
"2009" in the upper left of the figure shows an increase in the unemployment rate in that year
well above the one implied by the contraction in real GDP and Okun's law. In other words,
employers reduced their workforces at an unusually rapid rate near the business cycle trough
- perhaps because they feared an even more severe contraction to come or, with credit
availability sharply curtailed, they were trying to conserve available cash.
The diagram suggests that what we may be seeing now is the flip side of the fear-driven
layoffs that occurred during the worst part of the recession, as firms have become sufficiently
confident to move their workforces into closer alignment with the expected demand for their
products. Such a dynamic would explain the position of the square labeled "2011" in that
figure being far below the line representing Okun's law. Of course, Okun's law is a noisy
relationship, and we don't really know if the better-than-expected labor market performance
of 2011 has largely offset the worse-than-expected performance in 2009. However, to the
extent that the decline in the unemployment rate since last summer has brought
unemployment back more into line with the level of aggregate demand, then further
significant improvements in unemployment will likely require faster economic growth than we
experienced during the past year. It will be especially important to evaluate incoming
information to assess whether the recovery is picking up as improvements in the labor
market feed through to consumer and business confidence; or, conversely, whether the
headwinds that have impeded the recovery to date continue to restrain the pace at which the
labor market and economic activity normalize.
The challenge of long-term unemployment
Discussions of the labor market at this juncture necessarily have a "glass half-empty or
halffull" tone. Recent improvements are encouraging, but, as I have noted, in an absolute sense,
the job market is still far from normal by many measures, and millions of families continue to
suffer the day-to-day hardships associated with not being able to find suitable employment.
Although most spells of unemployment are disruptive or costly, the persistently high rate of
long-term unemployment we have seen over the past three years or so is especially
concerning. In this episode, both the median and average durations of unemployment have
reached levels far outside the range of experience since World War II (figure 11). And the
share of unemployment that represents spells lasting more than six months has been higher
than 40 percent since December 2009 (figure 12). By way of comparison, the share of
unemployment that was long term in nature never exceeded 25 percent or so in the severe
1981-82 recession.
Those who have experienced unemployment know the burdens that it creates, and a growing
academic literature documents some dimensions of those burdens. For example, research
has shown that workers who lose previously stable jobs experience sharp declines in
earnings that may last for many years, even after they find new work.2 Surveys indicate that
more than one-half of the households experiencing long unemployment spells since the
onset of the recent recession withdrew money from savings and retirement accounts to cover
expenses, one-half borrowed money from family and friends, and one-third struggled to meet
housing expenses.3 Unemployment also takes a toll on people's health and may have
longterm consequences for the families of the unemployed as well. For example, studies suggest
that unemployed people suffer from a higher incidence of stress-related health problems
such as depression, stroke, and heart disease, and they may have a lower life expectancy.4
The children of the unemployed achieve less in school and appear to have reduced
longterm earnings prospects.5
In addition, unemployment - especially long-term unemployment - imposes important
economic costs on everyone, not just the unemployed themselves. Elevated unemployment
strains public finances because of both lost tax revenue and the payment of increased
unemployment benefits and other income support to affected families. People unemployed
for a long time have historically found jobs less easily than those experiencing shorter spells
of unemployment, perhaps because their skills erode, they lose relationships within the
workforce, or they acquire a stigma that deters firms from hiring them. Loss of skills and
lower rates of employment reduce the economy's overall productive capacity over the longer
term. In the shorter term, because the process of matching the long-term unemployed to jobs
typically takes more time, the currently high level of long-term unemployment might in itself
be a reason that further progress in reducing the unemployment rate, and thus in achieving a
more complete recovery, could be slow.6
A pessimistic view is that a large share of the unemployment we are seeing, particularly the
longer-term unemployment, is structural in nature, reflecting factors such as inadequate skills
or mismatches between the types of skills that workers have and the skills that employers
demand. If this view is correct, then high levels of long-term unemployment could persist for
quite a while, even after the economy has more fully recovered. And it appears true that over
the past two decades or so, structural factors have been responsible for some increase in
long-term unemployment. For example, because an older worker who loses a job typically
takes longer to find a new job than does a younger worker in the same situation, the aging of
the baby boom generation has probably contributed to a gradual rise in long-term
unemployment. Factors such as globalization, technological change, and the loss of
lowerskill manufacturing jobs have likely reduced the employability and earnings potential of some
groups of workers. To the extent that higher rates of unemployment, especially long-term
unemployment, result from structural factors, the scope for countercyclical policies to reduce
unemployment would be impaired, and the benefits of a more complete economic recovery
for many workers who are unemployed or discouraged would be more limited.
3
See Paul Taylor, Rich Morin, Rakesh Kochhar, Kim Parker, Wendy Wang, Daniel Dockterman, Rebecca
Hinze-Pifer, and Soledad Espinoza (2010), "The Impact of Long-Term Unemployment: Lost Income, Lost
Friends - and Loss of Self-Respect" (Washington: Pew Research Center, July 22).
4
For example, see Frances McKee-Ryan, Zhaoli Song, Connie R. Wanberg, and Angelo J. Kinicki (2005),
"Psychological and Physical Well-Being during Unemployment: A Meta-Analytic Study," Journal of Applied
Psychology, vol. 90 (January), pp. 53-76; and Sarah A. Burgard, Jennie E. Brand, and James S. House
Journal of Health and Social
(2007), "Toward a Better Estimation of the Effect of Job Loss on Health,"
Behavior, vol. 48 (4), pp. 369-84. On life expectancy, see David J. Roelfs, Eran Shor, Karina W. Dawson, and
Joseph E. Schwartz (2011), "Losing Life and Livelihood: A Systematic Review and Meta-analysis of
Unemployment and All-Cause Mortality," Social Science and Medicine, vol. 72 (March), pp. 840-54.
5
See Ann Huff Stevens and Jessamyn Schaller (2011), "Short-Run Effects of Parental Job Loss on Children's
Academic Achievement," Economics of Education Review, vol. 30 (April), pp. 289-99; Ariel Kalil and Patrick
Wightman (2011), "Parental Job Loss and Children's Educational Attainment in Black and White Middle-Class
Families," Social Science Quarterly, vol. 92 (March), pp. 57-78; and Philip Oreopoulos, Marianne Page, and
Ann Huff Stevens (2008), "The Intergenerational Effects of Worker Displacement," Journal of Labor
Economics, vol. 26 (July), pp. 455-83.
6
For a discussion of this effect, see Daniel Aaronson, Bhashkar Mazumder, and Shani Schechter (2010), "What
Is behind the Rise in Long-Term Unemployment?" Federal Reserve Bank of Chicago, Economic
Perspectives, vol. 34 (2), pp. 28-51.
However, although structural shifts are no doubt important in the longer term, my reading of
the research is that, at most, a modest portion of the recent sharp increase in long-term
unemployment is due to persistent structural factors.7 Consider, for example, rates of job
finding by those unemployed for varying amounts of time (figure 13). Unsurprisingly, the rate
at which the long-term unemployed find work is lower than that of those who have been
unemployed for only a short time; on average over the period from 1994 to 2007, a bit more
than one-third of those already unemployed for one to four weeks found employment within
the next month. In contrast, over that same period, only about one-sixth of those already
unemployed for more than 27 weeks managed to find a job within a month.
If the recent increase in long-term unemployment were being driven by structural factors
rather than, say, the severity of the recession, then the job-finding rates of the long-term
unemployed should have fallen sharply relative to those out of work for only a few weeks. But
that's not what we're seeing. Rather, as figure 13 shows, the job finding rates of the more
recently unemployed and the long-term unemployed all fell over the recession in roughly the
same proportion, and they remain low.8 This pattern is consistent with cyclical factors
accounting for the bulk of the recent increase in long-term unemployment. Similarly, the fact
that labor demand appears weak in most industries and locations is suggestive of a general
shortfall of aggregate demand rather a worsening mismatch of skills and jobs.
Counterexamples like the energy boom in the upper Midwest, where there may be some
mismatch in the geographic location of suitably skilled workers or an overall shortage of
potential workers with relevant skills, might best be interpreted as the exceptions that prove
the rule; a mismatch story would suggest that strong labor demand would be appearing in
more sectors or geographical areas by now.
An empirical relationship that economists have long used to interpret developments in the
labor market is known as the Beveridge curve (figure 14). That curve - named after the
British economist William Beveridge - compares unemployment (the number of workers
looking for employers) to job vacancies (the number of workers that employers are seeking).
In good times, when the unemployment rate is low, businesses are growing and workers are
harder to find, so job vacancies tend to be high. Similarly, in bad times, unemployment is
high and few jobs are available (vacancies are low). Thus, the Beveridge curve, the
relationship between unemployment and vacancies, is downward sloping.
On the usual interpretation, a recession is a period in which the economy is moving down
along the Beveridge curve; as output and the demand for labor fall, job vacancies decline
and unemployment rises. In contrast, changes in the structural determinants of
unemployment are thought to be reflected in shifts of the Beveridge curve to the left or right.
For example, suppose that, because of changes in technology or in the mix of industries and
jobs, the mismatch between the skills of the unemployed and the needs of employers
worsens. Then, for a given number of job openings, the number of the unemployed who are
qualified for those jobs is smaller and the unemployment rate is higher than it would have
been before the mismatch problem worsened. Graphically, an increase in a skills mismatch
would be reflected in a shift of the Beveridge curve up and to the right.
From figure 14, we can see some outward shift in the relationship between job vacancies
and unemployment, consistent with some increase in structural unemployment since the
onset of the recession. However, a more in-depth analysis of the evidence suggests that the
apparent shift in the relationship between vacancies and unemployment is neither unusual
for a recession nor likely to be persistent. Research has found that during and immediately
after the serious recessions of 1973 to 1975 and 1981 to 1982, the Beveridge curve also
shifted outward, but in both cases it shifted back inward during the recovery. This temporary
outward shift during a deep recession may be the result of a particularly sharp increase in
layoffs, which raises unemployment quickly, even as vacancies adjust more slowly. Another
possible explanation for a temporary shift in the Beveridge curve is extended and emergency
unemployment insurance, which induces unemployed workers who might otherwise consider
leaving the labor force to continue searching for work. Or employers may be more selective
in hiring when their need for workers is not pressing and take more time to fill vacancies in an
effort to find especially qualified hires. In any case, the data appear consistent with the shift
in the vacancy-unemployment relationship in recent years having been relatively modest and
likely to reverse, at least in part, as the economy recovers further. When historical
experience is taken into account, these patterns do not support the view that structural
factors are a major cause of the increase in unemployment during the most recent
recession.9
Conclusion
To sum up: A wide range of indicators suggests that the job market has been improving,
which is a welcome development indeed. Still, conditions remain far from normal, as shown,
for example, by the high level of long-term unemployment and the fact that jobs and hours
worked remain well below pre-crisis peaks, even without adjusting for growth in the labor
force. Moreover, we cannot yet be sure that the recent pace of improvement in the labor
market will be sustained. Notably, an examination of recent deviations from Okun's law
suggests that the recent decline in the unemployment rate may reflect, at least in part, a
reversal of the unusually large layoffs that occurred during late 2008 and over 2009. To the
extent that this reversal has been completed, further significant improvements in the
unemployment rate will likely require a more-rapid expansion of production and demand from
consumers and businesses, a process that can be supported by continued accommodative
policies.
I also discussed long-term unemployment today, arguing that cyclical rather than structural
factors are likely the primary source of its substantial increase during the recession. If this
assessment is correct, then accommodative policies to support the economic recovery will
help address this problem as well. We must watch long-term unemployment especially
carefully, however. Even if the primary cause of high long-term unemployment is insufficient
aggregate demand, if progress in reducing unemployment is too slow, the long-term
unemployed will see their skills and labor force attachment atrophy further, possibly
converting a cyclical problem into a structural one.
9
For a discussion of shifts in the Beveridge curve during previous recessions, see John Lindner and Murat
Tasci (2010), "Has the Beveridge Curve Shifted?" Federal Reserve Bank of Cleveland, Economic Trends,
August; and Robert Valletta and Katherine Kuang (2010), "Is Structural Unemployment on the Rise?" Federal
FRBSF Economic
Reserve Bank of San Francisco, Letter, 2010-34, November 8. For research examining the
specific role of mismatch, see Regis Barnichon and Andrew Figura (2010), "What Drives Movements in the
Unemployment Rate? A Decomposition of the Beveridge Curve (PDF)," Finance and Economics Discussion
Series 2010-48 (Washington: Board of Governors of the Federal Reserve System, August); and Aysegül
Sahin, Joseph Song, Giorgio Topa, and Giovanni L. Violante (2011), "Measuring Mismatch in the U.S. Labor
Market," unpublished paper, Federal Reserve Bank of New York, July. Other factors affecting the Beveridge
curve include the role of extended unemployment benefits and potential effects of lags between vacancies and
hiring; on the effects of unemployment benefits, see Robert Valletta and Katherine Kuang (2010), "Extended
Unemployment and UI Benefits," Federal Reserve Bank of San Francisco, FRBSF Economic Letter, 2010-12,
April 19; on the lag between job vacancies and hiring, see Steven J. Davis, R. Jason Faberman, and John C.
Haltiwanger (2010), "The Establishment-Level Behavior of Vacancies and Hiring," NBER Working Paper
Series 16265 (Cambridge, Mass.: National Bureau of Economic Research, August), www.nber.org/papers
/w16265.
If this hypothesis is wrong and structural factors are in fact explaining much of the increase in
long-term unemployment, then the scope for countercyclical policies to address this problem
will be more limited. Even if that proves to be the case, however, we should not conclude that
nothing can be done. If structural factors are the predominant explanation for the increase in
long-term unemployment, it will become even more important to take the steps needed to
ensure that workers are able to obtain the skills needed to meet the demands of our rapidly
changing economy.
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