Janet L Yellen: What the Federal Reserve is doing to promote a stronger
job market
Speech by Ms Janet L Yellen, Chair of the Board of Governors of the Federal Reserve
System, at the 2014 National Interagency Community Reinvestment Conference, Chicago,
Illinois, 31 March 2014.
* * *
I am here today to talk about what the Federal Reserve is doing to help our nation recover
from the financial crisis and the Great Recession, the effects of which were particularly
severe for the people and the communities you serve.
Part of that effort has involved strengthening the financial system. New rules are in place to
better protect consumers and ensure that credit is available to help communities grow. The
Federal Reserve also plays a role in communities by fostering dialogue that promotes
community development. I will highlight some initiatives around the Federal Reserve System
that I believe are making a real difference. Later today, I will visit the Manufacturing
Technology Program at Daley College, on Chicago's south side, where adult students are
acquiring the skills they need to connect to good-paying jobs in that sector.
The Fed supports the work you do in communities because you make a difference. You help
ensure that credit is available for families to buy homes and for small businesses to expand.
Your organizations sponsor programs that help make communities safer and families
healthier and more financially secure. One of the most important things you do is to help
people meet the demands of finding a job in what remains a challenging economy. And that
help is crucial, but I also believe it can't succeed without two other things.
The first of these is the courage and determination of the people you serve. The past six
years have been difficult for many Americans, but the hardships faced by some have
shattered lives and families. Too many people know firsthand how devastating it is to lose a
job at which you had succeeded and be unable to find another; to run through your savings
and even lose your home, as months and sometimes years pass trying to find work; to feel
your marriage and other relationships strained and broken by financial difficulties. And yet
many of those who have suffered the most find the will to keep trying. I will introduce you to
three of these brave men and women, your neighbors here in the great city of Chicago.
These individuals have benefited from just the kind of help from community groups that I
highlighted a moment ago, and they recently shared their personal stories with me.
It might seem obvious, but the second thing that is needed to help people find jobs...is jobs.
No amount of training will be enough if there are not enough jobs to fill. I have mentioned
some of the things the Fed does to help communities, but the most important thing we do is
to use monetary policy to promote a stronger economy. The Federal Reserve has taken
extraordinary steps since the onset of the financial crisis to spur economic activity and create
jobs, and I will explain why I believe those efforts are still needed.
The Fed provides this help by influencing interest rates. Although we work through financial
markets, our goal is to help Main Street, not Wall Street. By keeping interest rates low, we
are trying to make homes more affordable and revive the housing market. We are trying to
make it cheaper for businesses to build, expand, and hire. We are trying to lower the costs of
buying a car that can carry a worker to a new job and kids to school, and our policies are
also spurring the revival of the auto industry. We are trying to help families afford things they
need so that greater spending can drive job creation and even more spending, thereby
strengthening the recovery.
When the Federal Reserve's policies are effective, they improve the welfare of everyone who
benefits from a stronger economy, most of all those who have been hit hardest by the
recession and the slow recovery.
Now let me offer my view of the state of the recovery, with particular attention to the labor
market and conditions faced by workers. Nationwide, and in Chicago, the economy and the
labor market have strengthened considerably from the depths of the Great Recession. Since
the unemployment rate peaked at 10 percent in October 2009, the economy has added more
than 7-1/2 million jobs and the unemployment rate has fallen more than 3 percentage points
to 6.7 percent. That progress has been gradual but remarkably steady - February was the
41st consecutive month of payroll growth, one of the longest stretches ever.
Chicago, as you all know, was hit harder than many areas during the recession and remains
a tougher market for workers. But there has been considerable improvement here also.
Unemployment in the city of Chicago is down from a peak of nearly 13 percent to about
9-1/2 percent at last count. That is about the same improvement as in the larger Chicago
metro area, where unemployment has fallen to 8-1/2 percent. Metro Chicago has added
183,000 jobs since 2009, just below the rate for job gains nationwide.1
But while there has been steady progress, there is also no doubt that the economy and the
job market are not back to normal health. That will not be news to many of you, or to the
348,000 people in and around Chicago who were counted as looking for work in January.2 It
will not be news to consumers or to owners of small and medium-sized businesses, who
surveys say remain cautious about the strength and durability of the recovery.
The recovery still feels like a recession to many Americans, and it also looks that way in
some economic statistics. At 6.7 percent, the national unemployment rate is still higher than
it ever got during the 2001 recession. That is also the case in Chicago and in many other
cities. It certainly feels like a recession to many younger workers, to older workers who lost
long-term jobs, and to African Americans, who are facing a job market today that is nearly as
tough as it was during the two downturns that preceded the Great Recession.
In some ways, the job market is tougher now than in any recession. The numbers of people
who have been trying to find work for more than six months or more than a year are much
higher today than they ever were since records began decades ago. We know that the
longterm unemployed face big challenges. Research shows employers are less willing to hire the
long-term unemployed and often prefer other job candidates with less or even no relevant
experience.3
That is what Dorine Poole learned, after she lost her job processing medical insurance
claims, just as the recession was getting started. Like many others, she could not find any
job, despite clerical skills and experience acquired over 15 years of steady employment.
When employers started hiring again, two years of unemployment became a disqualification.
Even those needing her skills and experience preferred less qualified workers without a long
spell of unemployment. That career, that part of Dorine's life, had ended.
For Dorine and others, we know that workers displaced by layoffs and plant closures who
manage to find work suffer long-lasting and often permanent wage reductions.4 Jermaine
1
According to the Bureau of Labor Statistics, total nonfarm employment for the Chicago-Joliet-Naperville
metropolitan division has increased 183,000 since December 2009, or about 5 percent. Over this period,
employment nationally has increased about 6 percent.
2
Bureau of Labor Statistics Local Area Unemployment Statistics for the Chicago-Joliet-Naperville metropolitan
division.
3
See Kory Kroft, Fabian Lange, and Matthew J. Notowidigdo (2013), "Duration Dependence and Labor Market
Conditions: Evidence from a Field Experiment," Quarterly Journal of Economics, vol. 128 (3), pp. 1123-67;
and Rand Ghayad (2014), "The Jobless Trap (PDF)," unpublished paper, Northeastern University, Department
of Economics.
4
See, among others, Louis S. Jacobson, Robert J. LaLonde, and Daniel G. Sullivan (1993), "Earnings Losses
of Displaced Workers," American Economic Review, vol. 83 (September), pp. 685-709; Steven J. Davis and
Till von Wachter (2011), "Recessions and the Costs of Job Loss (PDF)," Brookings Papers on Economic
Activity, Fall, pp. 1-55; Till von Wachter, Jae Song, and Joyce Manchester (2009), "Long-Term Earnings
Brownlee was an apprentice plumber and skilled construction worker when the recession hit,
and he saw his wages drop sharply as he scrambled for odd jobs and temporary work. He is
doing better now, but still working for a lower wage than he earned before the recession.
Vicki Lira lost her full-time job of 20 years when the printing plant she worked in shut down in
2006. Then she lost a job processing mortgage applications when the housing market
crashed. Vicki faced some very difficult years. At times she was homeless. Today she enjoys
her part-time job serving food samples to customers at a grocery store but wishes she could
get more hours.
Vicki Lira is one of many Americans who lost a full-time job in the recession and seem stuck
working part time. The unemployment rate is down, but not included in that rate are more
than seven million people who are working part time but want a full-time job. As a share of
the workforce, that number is very high historically.
I have described the experiences of Dorine, Jermaine, and Vicki because they tell us
important things that the unemployment rate alone cannot. First, they are a reminder that
there are real people behind the statistics, struggling to get by and eager for the opportunity
to build better lives. Second, their experiences show some of the uniquely challenging and
lasting effects of the Great Recession. Recognizing and trying to understand these effects
helps provide a clearer picture of the progress we have made in the recovery, as well as a
view of just how far we still have to go.
And based on the evidence available, it is clear to me that the U.S. economy is still
considerably short of the two goals assigned to the Federal Reserve by the Congress. The
first of those goals is maximum sustainable employment, the highest level of employment
that can be sustained while maintaining a stable inflation rate. Most of my colleagues on the
Federal Open Market Committee and I estimate that the unemployment rate consistent with
maximum sustainable employment is now between 5.2 percent and 5.6 percent, well below
the 6.7 percent rate in February.
The other goal assigned by the Congress is stable prices, which means keeping inflation
under control. In the past, there have been times when these two goals conflicted - fighting
inflation often requires actions that slow the economy and raise the unemployment rate. But
that is not a dilemma now, because inflation is well below 2 percent, the Fed's longer-term
goal.
The Federal Reserve takes its inflation goal very seriously. One reason why I believe it is
appropriate for the Federal Reserve to continue to provide substantial help to the labor
market, without adding to the risks of inflation, is because of the evidence I see that there
remains considerable slack in the economy and the labor market. Let me explain what I
mean by that word "slack" and why it is so important.
Slack means that there are significantly more people willing and capable of filling a job than
there are jobs for them to fill. During a period of little or no slack, there still may be vacant
jobs and people who want to work, but a large share of those willing to work lack the skills or
are otherwise not well suited for the jobs that are available. With 6.7 percent unemployment,
it might seem that there must be a lot of slack in the U.S. economy, but there are reasons
why that may not be true.
One important reason relates to the skills and education of people in the workforce. It is no
secret that America faces some daunting challenges in educating people and preparing them
to work in a 21st century, globalized economy. Many of you in this audience are helping
workers address this challenge, but you also know that the economy continues to change
very rapidly.
To the extent that people who desire to work lack the skills that employers are demanding,
there is less slack in the labor market. This is an example of what economists call "structural"
unemployment, and it can be difficult to solve. Even understanding what workers need to
appeal to employers is difficult in a fast-changing economy. For government, effective
solutions for structural unemployment, beginning with improved education, tend to be
expensive and take a long time to work. The problem goes deeper than simply a lack of jobs.
But a lack of jobs is the heart of the problem when unemployment is caused by slack, which
we also call "cyclical unemployment." The government has the tools to address cyclical
unemployment. Monetary policy is one such tool, and the Federal Reserve has been actively
using it to strengthen the recovery and create jobs, which brings me to why the amount of
slack is so important.
If unemployment were mostly structural, if workers were unable to perform the jobs available,
then the Federal Reserve's efforts to create jobs would not be very effective. Worse than
that, without slack in the labor market, the economic stimulus from the Fed could put
attaining our inflation goal at risk. In fact, judging how much slack there is in the labor market
is one of the most important questions that my Federal Reserve colleagues and I consider
when making monetary policy decisions, because our inflation goal is no less important than
the goal of maximum employment.
This is not just an academic debate. For Dorine Poole, Jermaine Brownlee, and Vicki Lira,
and for millions of others dislocated by the Great Recession who continue to struggle, the
cause of the slow recovery is enormously important. As I said earlier, the powerful force that
sustains them and others who keep trying to succeed in this recovery is the faith that their job
prospects will improve and that their efforts will be rewarded.
Now let me explain why I believe there is still considerable slack in the labor market, why I
think there is room for continued help from the Fed for workers, and why I believe Dorine
Poole, Jermaine Brownlee, and Vicki Lira are right to hope for better days ahead.
One form of evidence for slack is found in other labor market data, beyond the
unemployment rate or payrolls, some of which I have touched on already. For example, the
seven million people who are working part time but would like a full-time job. This number is
much larger than we would expect at 6.7 percent unemployment, based on past experience,
and the existence of such a large pool of "partly unemployed" workers is a sign that labor
conditions are worse than indicated by the unemployment rate. Statistics on job turnover also
point to considerable slack in the labor market. Although firms are now laying off fewer
workers, they have been reluctant to increase the pace of hiring. Likewise, the number of
people who voluntarily quit their jobs is noticeably below levels before the recession; that is
an indicator that people are reluctant to risk leaving their jobs because they worry that it will
be hard to find another. It is also a sign that firms may not be recruiting very aggressively to
hire workers away from their competitors.
A second form of evidence for slack is that the decline in unemployment has not helped raise
wages for workers as in past recoveries. Workers in a slack market have little leverage to
demand raises. Labor compensation has increased an average of only a little more than
2 percent per year since the recession, which is very low by historical standards.5 Wage
growth for most workers was modest for a couple of decades before the recession due to
globalization and other factors beyond the level of economic activity, and those forces are
undoubtedly still relevant. But labor market slack has also surely been a factor in holding
down compensation. The low rate of wage growth is, to me, another sign that the Fed's job is
not yet done.
A third form of evidence related to slack concerns the characteristics of the extraordinarily
large share of the unemployed who have been out of work for six months or more. These
workers find it exceptionally hard to find steady, regular work, and they appear to be at a
severe competitive disadvantage when trying to find a job. The concern is that the long-term
unemployed may remain on the sidelines, ultimately dropping out of the workforce. But the
data suggest that the long-term unemployed look basically the same as other unemployed
people in terms of their occupations, educational attainment, and other characteristics. And,
although they find jobs with lower frequency than the short-term jobless do, the rate at which
job seekers are finding jobs has only marginally improved for both groups. That is, we have
not yet seen clear indications that the short-term unemployed are finding it increasingly
easier to find work relative to the long-term unemployed. This fact gives me hope that a
significant share of the long-term unemployed will ultimately benefit from a stronger labor
market.
A final piece of evidence of slack in the labor market has been the behavior of the
participation rate - the proportion of working-age adults that hold or are seeking jobs.
Participation falls in a slack job market when people who want a job give up trying to find
one. When the recession began, 66 percent of the working-age population was part of the
labor force. Participation dropped, as it normally does in a recession, but then kept dropping
in the recovery. It now stands at 63 percent, the same level as in 1978, when a much smaller
share of women were in the workforce. Lower participation could mean that the 6.7 percent
unemployment rate is overstating the progress in the labor market.
One factor lowering participation is the aging of the population, which means that an
increasing share of the population is retired. If demographics were the only or overwhelming
reason for falling participation, then declining participation would not be a sign of labor
market slack. But some "retirements" are not voluntary, and some of these workers may
rejoin the labor force in a stronger economy. Participation rates have been falling broadly for
workers of different ages, including many in the prime of their working lives. Based on the
evidence, my own view is that a significant amount of the decline in participation during the
recovery is due to slack, another sign that help from the Fed can still be effective.
Since late 2008, the Fed has taken extraordinary steps to revive the economy. At the height
of the crisis, we provided liquidity to help avert a collapse of the financial system, which
enabled banks and other institutions to continue to provide credit to people and businesses
depending on it. We cut short-term interest rates as low as they can go and indicated that we
would keep them low for as long as necessary to support a stronger economic recovery. And
we have been purchasing large quantities of longer-term securities in order to put additional
downward pressure on longer-term interest rates - the rates that matter to people shopping
for a new car, looking to buy or renovate a home, or expand a business. There is little doubt
that without these actions, the recession and slow recovery would have been far worse.
These different measures have the same goal - to encourage consumers to spend and
businesses to invest, to promote a recovery in the housing market, and to put more people to
work. Together they represent an unprecedentedly large and sustained commitment by the
Fed to do what is necessary to help our nation recover from the Great Recession. For the
many reasons I have noted today, I think this extraordinary commitment is still needed and
will be for some time, and I believe that view is widely shared by my fellow policymakers at
the Fed.
In this context, recent steps by the Fed to reduce the rate of new securities purchases are
not a lessening of this commitment, only a judgment that recent progress in the labor market
means our aid for the recovery need not grow as quickly. Earlier this month, the Fed
reiterated its overall commitment to maintain extraordinary support for the recovery for some
time to come.
This commitment is strong, and I believe the Fed's policies will continue to help sustain
progress in the job market. But the scars from the Great Recession remain, and reaching our
goals will take time. In the meanwhile, the Federal Reserve will continue to expand its efforts
to promote community development. The Board and each of the 12 Reserve Banks have
community development staff members who focus on improving the availability of financial
services in low- and moderate-income communities. They help bankers comply with the
Community Reinvestment Act, but they are also a source of research and a facilitator of
communication among financial institutions and practitioners to identify and share best
practices.
This conference is one example of how the Fed pursues those goals, and I would like to
mention a few of the Fed's other community development initiatives that I find particularly
promising. In 2012, The Federal Reserve Bank of San Francisco partnered with the Low
Income Investment Fund (LIIF), a community development financial institution that bridges
the gap between low-income neighborhoods and private capital sources, to publish the book
Investing in What Works for America's Communities. This book cited innovative and effective
community development initiatives across the country and advocated for a "Community
Quarterback" model to coordinate initiatives and better leverage funding among groups with
similar goals.
In a similar way, the Federal Reserve Bank of Boston has been the catalyst for the Working
Cities Challenge, inspired by its own research on cities that managed to diversify away from
a declining, manufacturing-based economy. The research found that one key to success is
"collaborative leadership," when governments, businesses, and nonprofits unite behind one
focused approach. The Working Cities Challenge promotes that principle by inviting smaller
Massachusetts cities to consider how they would use collaborative leadership to unite their
communities to address a major challenge for lower-income residents. Twenty cities
competed for $1.8 million in funding from the state and other sources. Six cities were
awarded funds this past January, but many more will benefit from the spread of a new
approach to capacity building that Fed research shows helps communities thrive.
Leadership recruitment is also at the heart of a grassroots-oriented program called Economic
Avenue that was developed by the Kansas City Fed. In Northeast Kansas City, Kansas,
residents and neighborhood leaders are forming a leadership council that will have
responsibility for managing the program, which aims to create and grow local businesses,
create jobs, and promote homeownership. The bank's community development staff is
providing education and training to get the council off the ground, will measure and evaluate
its progress, and assist in connecting leaders to resources and other programs.
These examples are just a few among many throughout the Federal Reserve System. By
testing ideas, developing better measurement tools, convening interested parties, and
sharing the Federal Reserve's skills and knowledge with our partners at the national and
local levels, we aim to serve as a catalyst to improve lives.
Through these initiatives, together with the use of monetary policy and steps to safeguard the
financial system, the Federal Reserve is committed to strengthening communities and
restoring a healthy economy that benefits all Americans. It is my hope that the courageous
and determined working people I have told you about today, and millions more, will get the
chance they deserve to build better lives.