Long-term unemployment creates a drag on inflation similar to that created by short-term joblessness, according to a new paper by a Federal Reserve economist paper that casts doubt on the notion that researchers should study the two categories separately.
People attend a job fair in Detroit in March. Reuters
The debate is important for a still-sluggish U.S. economic recovery because it could influence the Fed’s policy response to continued high unemployment, which was 6.7% in March.
Alan Krueger, a Princeton University professor and former adviser to President Barack Obama, recently argued that the long-term unemployed—those who have been without work six months or longer–were so detached from the job market that they weren’t major drivers of wage-growth or inflation.
However, Michael Kiley, associate director of the Fed’s Office of Financial Stability Policy and Research, writes in the paper, “We ﬁnd that that short- and long-term unemployment exert equal downward pressure on price inﬂation.”
Fed Chairwoman Janet Yellen has argued that a significant portion of the long-term unemployment problem is due to a depressed economy rather than structural issues such as aging or the gap between workers’ skills and employers’ needs. According to her line of thinking, Fed policies could help spur hiring by boosting demand. If the problem is primarily structural, as some other economists have argued, Fed policies are less likely to make any difference in employment.
“I believe that long-term unemployment might fall appreciably if economic conditions were stronger,” she said in a speech this month.
Mr. Kiley’s paper corroborates her findings. He said that by using regional data sets rather than simply national figures, he was able to “discriminate the independent inﬂuences of short- and long-term unemployment” on inﬂation.
“The results suggest that long-term unemployment has exerted similar downward pressure on inﬂation to that exerted by short-term unemployment in recent decades,” the author says.
– Ben Leubsdorf contributed to this article
By PEDRO NICOLACI DA COSTA WSJ.com