Mark Carney on the “Natural Rate” of Unemployment.
I was disturbed to read this comment on the current state of the US economy in Mark Carney’s speech last week.
“The natural rate of (US) unemployment may be increasing sharply. The scale of industry restructuring means that some unemployed workers do not have the skills suitable for the expanding sectors. Other job seekers are tied to their local area, due to an inability to sell their homes in distressed markets, hampering the mobility that has been a hallmark of the American labour market. The current cycle is also self-reinforcing. As long-term unemployment becomes more entrenched, workersâ€™ skills deteriorate and their reintegration into the labour force becomes more difficult.”
Why is this disturbing.
In the first place, claims that structural unemployment in the US are on the rise serve an ideological purpose.
There just isn’t any convincing evidence that any significant part of US unemployment as “structural” as opposed to being the resultÂ of the economy operating well below capacity, but opponents of fiscal and monetary surplus want us to believe otherwise.
Krugman recently blogged on this as follows:
“Claims that there has been a huge jump in structural unemployment â€” that is, unemployment that canâ€™t be cured by increasing aggregate demand â€” are playing a large role in the argument that we should basically do nothing in the face of a terrible economy. No need for the Fed to do more; no need for more fiscal stimulus â€” hey, itâ€™s all about defective labor markets, and we should work on structural reform, one of these days. And donâ€™t expect improvement for years to come. Structural unemployment is invoked by Fed presidents who want to raise rates, not cut them, by economists who want austerity now now now, and in general by almost everyone in the pain caucus.”
As he also Â notesÂ in a column as well as his blog post, high and extended uneployment could have an effect on the skills of workers, lowering future economic potential .Â But there is zero evidence of significant unfilled job openings in the US right now.Â A Â recent EPI study found no evidence for what he calls ” labor mismatch â€” layoffs in some industries combined with labor shortages in others; high unemployment for some types of labor combined with tight markets and soaring wages for others; high unemployment in some regions but exceptionally good hiring in others…. none of these things are, in fact, visible.”
So, just Â why is Canada’s Mark Carney siding with the more conservative elements in the US Federal Reserve?
And what is even more disturibingÂ is his adoption of the language of a “natural” or “non accelerating inflation” rate of unemployment, generally defined as the rate to which unemployment cannot fall without triggering an accelerating increase in inflation (than which there is, of course, Â nothing worse in the lexicon of central bankers.) This is something of a throwback toÂ the 1980s.
The Bank of Canada has (unlike the OECD) Â actually avoided such language in recent years, focusing on the more nuanced concept of an output gap. In this view, there is more to the economy’s capacity than the job market, and there is some recognition that we cannot know in advance at what level of unemployment inflationary pressures would start to build.Â The US experience in the Clinton years was that inflation did not pick up as unemployment fell to low levels, and the same was true of Canada before the recession when unemployment fell to 6%, far below most previous estimates of the “natural” rate.Â Â
As critics of the natural rate concept have long argued, it is a circular concept, in which central banks fear testing the limits of capacity out of exaggerated fear that unemployment might be pushed to levels which are “too low.” They put on the monetary brakes prematurely to avoid running a risk which is purely theoretical. Far better to test the limits, and then to react to any inflationary pressures which actually happen, rather than exist only in econometric models.
If Carney really thinks structural unemployment is on the rise in the US, he probably thinks the same may be the case here. In which case, he and the economists at the Bank of Canada are probably redefining “full unemployment” as something closer to 7% than the pre recession rate of 6%.
Which may in turn explain why they were so quick out of the gate to start to withdraw “extraordinary monetary stimulus.”
I read this on Krugman’s post the other day as well, and I was waiting to hear it on this side of the border. I must say I was not expecting it from the BOC.
Quite a pathetic body blow to the mass of unemployed out there. It truly is a remarkable feat economists have constructed out all this pain and human misery of adjustment-and let’s not kid ourselves the notion that somehow this is justifiable in some notion of creative adjustment is just as bad. Wow this profession keeps sinking to new lows of morality. Some people might simply think these are but words, however they do transorm into lives and misery and death as if we just need to scrap everything once every few years decades and somehow this is logical.
Thinking about it a bit more- Carny is part of this crowd. And they are most assuredly in damage control mode. Everybody is hurling stuff at Goldman sachs and the rest. My guess is Carny got the email from the boys to launch into full attack mode- blame the victim is a defense that only the big egos on Wall Street could conjure up. Do you believe one person is sick enough to actually believe the natural rate of unemployment has accelerated-what a egotistically short sighted radically obtuse of reality bunch- and now we know Carny is really in deep with this crowd- which is pretty scary.
It is interesting how Carney presents cyclical factors – â€œdistressedâ€ real estate markets and skills deteriorating during cyclical unemployment – as increasing the â€œnaturalâ€ rate of unemployment.
The real implication of his analysis is that we should keep stimulus firing on all cylinders to reduce cyclical unemployment as much and as quickly as possible before it becomes â€œmore entrenchedâ€ and hence structural.
I thought the invisible hand handled that kind of jobs-skills mismatch? Why does Carney expect that this is a long run problem that would affect the NAIRU?
As to not being able to do anything about it — how about some active fiscal polity in the shape of education/training investment?
It also seems to me that reduced labour mobility due to the housing crash is a temporary thing rather than a phenomenon that will persist in the long-run.
Besides, what of all the young workers who tend to be renters not owners. Why aren’t they moving to take advantage of the labour market opportunities? The answer seems to be more along the lines of what Andrew’s suggesting — there just aren’t that many unfilled jobs waiting to be taken.
Here is the argument as Nick Rowe has laid it out. The NAIRU goes up because capacity not used quickly becomes dead capacity. And thus measures of capacity utilization are a misleading measure because a significant chunk of what is being measured is capicity that will never come back on-line. Hence estimates of the output gap and thus inflation which do not take this “known fact” into account will over-estimate real capacity and thus underestimate inflationary pressures. Now couple this with the New Keynesian support / origin of the hysteresis hypothesis and voila you have two reasons: one on the supply side of employment and the other on the supply side characteristics of workers (skill mismatch).
OF course the only thing missing is the third leg of the unholy troika: actual evidence of a skill mismatch, which as Andrew points out following Krugman (I think) there is no evidence.
Carney has inveighed against classical Keynesians. Involuntary employment; as Lucas would say, all unemployment is voluntary.
Letter to Editor:
Re: Time for Canadians to face stark economic truths, Michael Den Tandt, Oct 2
Reduced government services, which Michael Den Tandt prescribes, would cause more pain to the poor than to the rich. An alternative course of action might require that the financial sector, which did so much to bring about a deep recession, pay its fair share by means of a financial transaction tax. However, this scenario could cause inconvenience to the rich and the financial elites. Is that the reason “stark economic truths” are never about choice?
The above article is supported by a recent small business survey in the U.S. according to which â€œpoor salesâ€ are the main problem facing small businesses. In contrast, mismatch or lack of the right skills seems to be a non-problem. See page 18 at:
If you believe that a significant amount of capacity has been made redundant, then you would also believe that a significant amount of the manufacturing jobs that were lost are permanent; thus a skills mismatch and smaller output gap. Et voila, a higher NAIRU. Notice how raising rates locks in the job losses via an appreciating CDN dollar.
In any case the fact is inflation is below the mid target of 2% and well below 3%. So nothing precludes stimulus even under monetarism mark II.
Maybe Carney needs to find a reason to raise rates because low interest rates are savaging among others, the pension and insurance industries.
I truly have to say I have yet to discover a more nasty economic attempt at constructing an explanation to quell the wealth elites within the profession of economic analysis.
It has got to be one of the lowest, unjustified, dividing point within our profession.
I say this right here and now- if you are an economist and you even remotely believe that the natural rate of unemployment has made the move as suggested above- you are an apologist idiot- plain and simple. these lackeys of the rich and ‘keep the
barbarians from the gates’ crowd are in a desperate state, but this goes too far. Way over the edge into the dark caves of a time before civil society.
Carny needs to be pulled onto the carpet for even hinting at such lame notions.
Phrack these idiots piss me off. What now we probably get some statscan reports justifying his statement- if that happens we will know the revolution is complete and Harper has achieved his goal of democracy interruptus.
I just had a short discussion through Facebook with no othervthan Robert Reich, where I asked him what he thought of these remarks about the rise in the natural rate, and he stated quite bluntly that Carney’S statement is complete ‘bunk’.
Cool huh- I always liked Reich, read a few of his books and he has some good ideas. I guess I better pick up his latest.
Go have look at his Facebook for those wanting to see his entire response to my question.
One does wonder what, for such economists, economics is supposed to be for.
I mean, if the point of economics is to worship the “natural”, and to conclude that no matter what the unemployment rate or how deep the recessions get or how great the impoverishment, the issue is to contemplate the unspoiled beauty of the un-interfered with economy, that would be an interesting aesthetic choice. I’m not sure what such connoisseurs should have to do with running central banks. But this “unspoiled wilderness at all costs” attitude rings hollow–these people have no interest in “natural” if it might mean a financial institution would take a loss.
If “natural” rates of unemployment are supposed to edge ever higher because of the “natural” offshoring of jobs due to free trade with no labour or environmental standards, and that’s all OK because it is in some bizarre sense “efficient”–at what point should the citizens of a country demand that their polity be managed with a view to their actual benefit by people willing to do things that are “unnatural” or even “inefficient” if it means real people get decent jobs, rather than by a bunch of abstract aestheticians who, upon hearing that the populace have no bread, can be counted on to suggest “Let them eat debt”!
There is a natural rate of unemployment. it is approx 5%. Any length of time it deviates from that is brought about by policy failure. For Carney to suggest that the there is a new natural is nothing more than an attempt to provide cover for poor policy.
This idea is a pathetic as his scolding of Canadian businesses for falling productivity. No amount of productivity gains can offset a manipulated comparative advantage. Canadian businesses know better than to throw good money after bad.
On the other hand, where are our institutions that will champion better policy? I look with envy at the United Steelworkers whom filed a 5,800 page illegal trade petition documenting, Chinaâ€™s multiple illegal trade practices on clean energy and other green technologies.