Ryan Avent is surprised by how quickly Minneapolis Fed President Narayana Kocherlakota is accepting structural unemployment as a reason for not pursuing monetary policy. Federal Reserve Bank of Kansas City President Thomas M. Hoenig is calling for a raise of interest rates, and Richard Fisher of the Dallas Fed is taking unemployment off his “to do” list at the Fed.
I think there’s an implicit meme here that these states have little to no unemployment problems. What does unemployment look like in these people’s states? From google’s public data, we get this graph:
(I included both Missouri and Kansas for Kansas City, since I am never sure where people from there consider home, though the Fed Building seems to be in Missouri.)
These states are all mostly at the low end of unemployment, but they are still higher than the 20 year average. Let’s take the lowest end, Kansas. It’s the highest it’s been in 20 years and it’s leveling out. Is that all “sectoral mismatch”? The real worry is that these specific Fed chairmen are performing a type of inception on you, and you’ll wake up from a dream within a dream within a dream and think “Well 6.5% unemployment isn’t that bad for Kansas. It’s actually a pretty respectable number, all things considered” and you’ll think you came up with that argument yourself.
My subconscious has been militarized and I don’t buy that for a second. 6.5% is terrible! It’s more than a 50% increase over the normal steady state of the past 20 years. Kansas had no significant housing bubble or overdeveloped financial sector, so it can’t be entirely attributable to the implied structural critiques from the bubble. And it leads to a bind: if adding 2% is appropriate for structural unemployment, what about the 5%+ in U3 we’ve added at the national level? Is there any room for cyclical demand management anywhere?
And the story is worse if you look elsewhere (though oddly not Minnesota) among these states. People have discussed Texas before and it is standing out as a poor example. Even in the flat states, even in places with smaller economies less dependent on construction or finance there is a major unemployment problem that mirrors the unemployment crisis going on in the rest of the country.
Rortybomb 
I think the internets are focusing on the wrong parts of Kocherlakota’s speech, and consequently drawing the wrong conclusions. The speech was principally about how the Fed operates. We don’t care about this. The secondary topic was deflation and its avoidance. Witness the long section about the neutrality of money. The tertiary topic was structural unemployment. By focusing on the tertiary instead of the secondary topic, people get the wrong conclusion.
Kocherlakota raises the employment point briefly before continuing to his point about inflation. Which is that if short term rates are left too low for too long, the consequence will be a deflationary trap. This leads to his prediction that the Fed will need to raise rates in the unspecified but not distant future. He concludes by circling back to the state of the labor markets, noting that this may need to happen while employment is still high.
The last point is worth noting. He is clearly saying that the Fed will not be able to maintain money stability and create employment at an acceptable level. This is a major statement. I’m shocked that nobody seems to be talking about it. I expect that we may see other Fed officials making similar statements. And as I see it this is well and proper. It puts pressure on the President and Congress to make tangible progress on employment, which they have thus far scrupulously and shamelessly avoided.
More on those net-tubes misunderstanding Narayana.
When he says that much of unemployment is mismatch he’s not necessarily equating that with Keynesian structural unemployment (whatever that is), he’s talking about labor search models, which can have cyclically variations in matching rate.
There’s a really big literature on unemployment causing labor frictions that arise because workers and firms are imperfect at finding each other. It makes a lot of sense that this friction would be worse in the the current climate if housing woes make it more difficult to relocate, or workers may lose bargaining power, these would both increase the matching friction. On the firm side, one of my colleagues here (Andy Glover) is working out the theoretical implications of a diverse labor pool during a recession: firms with vacancies don’t know everything about the applicants and lots would lead one to believe that this uncertainty would be more damaging to their vacancy posting rate during recessions (tell yourself a story: more diverse worker pool because it’s larger, productivity rises for existing workers imply the certainty equivalent of an unknown worker is relatively lower, etc).
A big important correction here is that “mismatch” is not “sectoral mismatch”: in fact, sectoral reallocation is generally not so huge during a recession. Mismatch is on a more micro firm-to-worker mano-y-mano level, as I described above.
(funny side note: I’m posting this from inside the Minneapolis Fed)
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