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May 8, 2013

Fed Watch: 'Really? One Basis Point?' and 'Rising Structural Unemployment?"

Two from Tim Duy. Here's the first:
Really? One Basis Point?, by Tim Duy: Bloomberg has a story with an ominous opening paragraph:
Bank of Japan Governor Haruhiko Kuroda’s stimulus policies are backfiring in the housing market, where mortgage rates are rising even as the central bank floods the financial system with cash.
Lions, tigers, and bears, oh my! The next paragraph:
Fixed 35-year home-loan costs rose to 1.81 percent this month, the first increase since February and up from an all-time low of 1.8 percent in April, according to data compiled by the Japan Housing Finance Agency. Federal Reserve Chairman Ben S. Bernanke’s monetary easing almost halved 30-year U.S. mortgage rates since 2008 to 3.35 percent on May 2.
Seriously? The case against Kuroda is that after declining since February, mortgage rates climbed a whole basis point? And Kuroda is expected to accomplish in a few months what took Bernanke five years? And I thought I could be a harsh critic of central bankers!
Hopefully this is just a typo; I can't seem to locate a time series of the 35-year mortgage rate in Japan. Otherwise, one might be tempted to conclude that the reporters were biased against Abenomics.
And here's the second:
Rising Structural Unemployment?, by Tim Duy: This tweet from Andy Harless caught my eye:
HIres-to-openings ratio looking uglier & uglier… Looks like rising structural unemployment
— Andy Harless (@AndyHarless) May 7, 2013
The chart:
The ratio of hires to openings fell to the low of the last cycle. Now compare the ratio to the unemployment rate:
Unemployment appears to be too high relative to the hires/openings ratio (caution is warranted, however, as the JOLTS data only extends back to 2001). One would normally associate such a low ratio with low unemployment as the number of hires would be relatively low because of the lack of available workers. In this case, however, the number of hires appears to be low despite a large pool of potential employees, consistent with the concern that available workers lack the skills firms seek. Structural unemployment, as Harless suggests.
That said, recall that Matthew O'Brien pointed us at research here and here suggesting that high unemployment is attributable not to structural factors, but instead to a bias against the long-term unemployed. O'Brien recognizes the insidious nature of this problem:
Circles don't get more vicious than this. The people who need work the most can't even get an interview, let alone a job. It's a cycle that could end with the long-term unemployed becoming unemployable. It's what economists call hysteresis, the idea being that a slump, left untreated, can make us permanently poorer by reducing our future ability to do and make things.
Bias against the long-term unemployed might explain why wage growth remains muted:
One would think that a low hires/openings ratio suggests that wage growth would be accelerating (as employers appear to face a relative shortage of workers), but that is not the case. Indeed, low wage growth is one reason to believe that excessive unemployment is cyclical in nature. How does this fit with the long-term unemployed story above? Perhaps that although firms have a bias against the long-term unemployed, those potential workers still place downward pressure on wages. The newly unemployed don't require higher wages despite demand for their skills because they know there is a large pool of people available with similar skills. If the newly unemployed demand too high wages, they may induce employers to take another look at the pool of long-term unemployed. Consequently, they do not seek higher wages.
Incidentally, this also explains the low quits rate. The consequences of becoming long-term unemployed are particularly severe, raising the expected cost of voluntarily leaving a job.
So I guess the "good" news would be this: If bias against the long-term is simply creating the illusion of structural unemployment, then we are not yet faced with the problem of hysteresis. If the pool of long-term unemployed can place downward pressure on wages, then they must have a valuable skill set. Otherwise, they would not represent a threat to the newly unemployed. Keep the demand up for employees long-enough, and firms will eventually give up their bias against the long-term unemployed (I assume this would be preferable to the alternative of prematurely escalating wages). Eventually, the pool of unemployed would decrease and then wage pressures increase.
Still, the longer we wait for this bias to diminish, the more likely it is that the unemployment does indeed become structural. Then we would expect rapidly rising wages despite elevated unemployment. Another argument for pulling on all the stimulus levers. Alas, that is not the case.
Update: And after I wrote all this, I saw this Harless tweet:
Likely part of the reason 4 low hires/opening is that most applicants r now long-term unemployed, who face a more rigorous screening process
— Andy Harless (@AndyHarless) May 8, 2013
Apparently on the same path.

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