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The key question: Is U.S. unemployment structural or cyclical?

  • Blog Post by: Adam Belz
  • October 12, 2012 - 1:31 PM

Narayana Kocherlakota's shift on Federal Reserve interest rate policy has been well-documented.

But his evolution toward calling for low interest rates until unemployment falls to 5.5 percent is likely in part a function of his changing position on another debate among economics: Whether U.S. unemployment is structural or cyclical.

The question is whether you think that the economy has shifted and changed fundamentally (the problem is structural) or that we just have a slow economy that can be stimulated by low interest rates (cyclical).

If it's structural, the economy is creating jobs for which there are no qualified workers and leaving workers jobless because their skills and geography don't give them a shot at any of the newly-created jobs. Low interest rates won't get an out-of-work carpenter a job as a nurse, the argument goes.

Two yeara ago, joblessness was rising at the same time as job openings, which shouldn't be the case if unemployment is just the result of a weak economy. Kocherlakota, the president of the Federal Reserve Bank of Minneapolis, argued then that Fed monetary policy could do little to bring down unemployment because it was structural.

His about-face, which he announced in September and reiterated in a speech in Montana on Wednesday, comes in the context of a shifting consensus on the structural vs. cyclical debate.

The best example is a paper by Stanford University economist Edward Lazear, presented at a Jackson Hole symposium in September, which argued there's no evidence of structural problems fueling unemployment. Instead, joblessness is cyclical, which ultimately means low interest rates can do something to help.

Not everyone agrees. BMO Private Bank in Chicago published some analysis this week criticizing the Fed for its low interest rate policy, arguing unemployment is structural.

"It appears the Fed’s justification for money printing rests solely on the maddeningly slow pace of labor market amelioration in the US," the analysts wrote. "The question is whether or not monetary policy can even improve the pace of hiring.  We harbor doubts.  The employment problem is structural in nature, indicating that no amount of money creation will help."

Give or take, that's about where Kocherlakota stood in August 2010, when he gave this speech in Marquette, Mich. Apparently he's not as convinced that employment is structural anymore. 

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