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Mon Aug 20, 2012, 10:39 PM

"Fed Studies Show Damage to Labor Market Is Reversible" by Alex Kowalski at Bloomberg News

Fed Studies Show Damage to Labor Market Is Reversible

By Alex Kowalski at Bloomberg News



Most of the damage inflicted on the U.S. labor market by the recession is reversible, according to Federal Reserve research, leaving open the possibility that additional stimulus will be effective in reducing joblessness.

About one-third, or 1.5 percentage points, of the jump in unemployment from 5 percent as the economic slump began to its 10 percent peak in October 2009 can be traced to a mismatch between the supply of labor and job openings, according to a study released this month by the Federal Reserve Bank of New York. That leaves the remainder due mainly to a lack of demand.

“There is still considerable weakness in the labor market,” Aysegul Sahin, one of the authors and a New York Fed economist, said in an interview. “We see that the weakness in the labor market is not specific to certain groups, such as certain occupations or certain locations. This points to a case where labor market weakness can be attributable to the overall weakness in the economy.”

That conclusion goes to the heart of a debate pitting economists at banks like UBS Securities LLC and Barclays Plc who say the economy has fundamentally changed against central bankers, including Chairman Ben S. Bernanke, who say the distortions are transitory. A permanent shift would mean policy makers applying additional stimulus risk spurring inflation by driving unemployment down too far too quickly, while a temporary dislocation would indicate more can be done.


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