Minneapolis Fed president sees mismatch driving unemployment rate

Narayana Kocherlakota
Narayana Kocherlakota

A mismatch of worker skills, the location of available jobs and a less mobile workforce has added 2.5 points to the nation’s unemployment rate, the president of the Minneapolis Federal Reserve Bank believes.

“Firms have jobs, but can’t find appropriate workers. The workers want to work, but can’t find appropriate jobs,” says Fed President Narayana Kocherlakota. “For example, there may be jobs available in eastern Montana and western North Dakota because of the oil boom. But a household in Nevada that is underwater on its mortgage may find it difficult to move to those locations.”

Kocherlakota said the relationship between job openings and the unemployment rate, which had been stable through much of the past decade, “has completely shattered” over the past year. Speaking in Missoula, Mont., (PDF) earlier this week, he described the lack of strong job growth as “disturbing.”

The Fed president cited a recent study that shows the gap between demand and supply for workers with different levels of education. That factor, when combined with state-by-state foreclosure rates that inhibit worker mobility, can account for 1.5 points on the unemployment rate, the study found.

Together, they explain most of the projected 2.5 percentage point impact caused by the mismatch, he said.  Kocherlakota also cited a San Francisco Fed estimate that the unemployment rate is boosted an additional 0.4 percentage points from the disincentive effects of extended unemployment insurance benefits.

If the historical relationship between job openings and employment were in place today, “we would have an unemployment rate closer to 6.5 percent, not 9.6 percent,” he said. He does not see a rapid decline in the unemployment rate anytime soon. “I expect it to be above 8 percent into 2012.”

There is little that Fed monetary policy can do directly to address the mismatch problems in the labor market, he cautioned, suggesting that job retraining programs or foreclosure mitigation strategies would be more appropriate policy tools.

Kocherlokota, who joined the Fed last October, does not currently sit on the Federal Open Market Committee — the FOMC — which sets short-term interest rates, but he will rotate onto that committee next year.

Nevertheless, he endorsed the recent move by the Fed to take funds it receives when mortgage-backed securities are redeemed and reinvest them in long-term Treasuries. The move, which the Fed announced last month, is intended to prevent a rise in long-term interest rates, which would be “a drag on the recovery,” he observed.

He describing the news about inflation and the Gross Domestic Product as “in the ‘good, but certainly could be better’ category.”

“There is a recovery under way in the United States,” Kocherlakota said. “But, as expected, it is a modest one.”

He expects the economy to grow about 2.5 percent in the second half of 2010 and close to 3 percent in 2011.

The Minneapolis forecasting model predicts that inflation will rise slightly “into the more desirable 1.5 to 2 percent range in 2011,” from the current 1 percent, he said.

The recently released Beige Book reports from the 12 Fed Districts suggest continued economic growth through the end of August, but “with widespread signs of a deceleration.” The five western districts of St. Louis, Minneapolis, Kansas City, Dallas and San Francisco showed the strongest growth.

The Minneapolis Fed Beige Book reported modest growth in consumer spending, tourism, residential construction, services, manufacturing, energy, mining and agriculture across the six-state Ninth District. Commercial and residential real estate activity declined while commercial construction remained weak, according to the report.

Kocherlakota emphasized the importance of Fed independence, saying:

“In effect, Congress has said that it does not want monetary policy unduly affected by political considerations. This independence is not only a hallmark of this country’s central bank, but is also a characteristic of developed economies worldwide.

“We are unabashed technocrats, seeking to solve an unabashedly technical problem: How do we manage monetary policy so as to ensure lower unemployment and maintain inflation at an appropriate rate? We certainly disagree with one another on occasion. But our disagreements ultimately stem from different assessments of the complicated economic situation and not from political differences.”

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