Fed Meeting To Examine Post-Recession Job Market Strength

David Greene talks to David Wessel of the Brookings Institution about how Federal Reserve economists consider various measurements of employment in their policymaking. Fed officials meet this week.

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DAVID GREENE, HOST:

Officials at the Federal Reserve will be meeting today and tomorrow. And one thing that will determine their actions is the employment situation in the country. Now, there's some disagreement among economists - both inside and outside the Fed - over how close the job market is to regaining its pre-recession strength.

To find out more, we turn as we often do to David Wessel. He's director of the Hutchins Center at the Brookings Institution and a contributor to the Wall Street Journal. David, good morning.

DAVID WESSEL: Good morning.

GREENE: So let's look at one of the important numbers here. I mean the unemployment rate in the country peaked at 10 percent during the worst of the recession. It's been falling. It's down to 6.7 percent and that sounds like a pretty good trend, right?

WESSEL: It is a good trend. The unemployment rate has come down. The Fed expects it to keep falling. But the basic issue they're confronting is whether the unemployment rate has become what you might call a misleading indicator of how strong the job market is...

GREENE: OK.

WESSEL: ...of how close we are to the point where the pool of unemployed workers has shrunk to the point where wages start rising too fast for the Fed's comfort.

GREENE: So what wages going up sounds like a good thing, but they can go up to quickly, you're saying.

WESSEL: That's right. The fed would like to see what wages going up, but if they rise too much then companies raise prices and inflation - it can rise above the 2 percent target that the Fed have set. So they'd like to see a little wage increase but they'd like to act to put the brakes on the economy before they see too much. Now, some of the people who are unemployed have been out of work for just a few weeks, but an unusually large fraction have been out of work for six months or more - nearly 40 percent at last count. And they're some economists - Alan Krueger at Princeton, Robert Gordon at Northwestern - who say that many of these long-term unemployed are going to be on the sidelines of the economy for basically forever. And they say so they're unemployed, these people aren't putting much downward pressure on wages and their advice to the Fed is, keep an eye on the shrinking number of people who've been out of work for only a few weeks or for less than six months.

GREENE: All right, so some economists say you should keep an eye on other things, not necessarily just the unemployment rate. Do all economists agree that the unemployment number can be misleading?

WESSEL: Well, all economists agree that it's too simple a measure. But what's interesting is that there are some economists - among them Michael Kiley, who works at the Fed, who challenge Krueger and Gordon and say that what matters is the overall unemployment rate, regardless of how long the people have been out of work. And they say look up, it's still high. It's more than a point above what the Fed says it should be, so the Fed should be very, very slow to take its foot off the monetary gas pedal.

And then there are other people who say, look, the unemployment rate is distorted because so many people have stopped looking for work, they're not counted as officially unemployed and they would come back into the job market, they'd be working if only there were more jobs. So they say there still is, as economists put it, a lot of slack in the labor market, a lot of people would be working if the Fed could get the economy running faster.

GREENE: Has the new Fed chair, Janet Yellen, weighed in on this?

WESSEL: She has, and that's really interesting. She has really taken a side. She's firmly of the view that there are a lot of idle workers who'd be working if there were more jobs. She's dismissed the notion that we should just look at the short-term unemployed. And she says that other gauges show you how weak the labor market is; how many people are working part time, even though they'd prefer full-time jobs? How many people are reluctant to quit their jobs, the unusually low number - which is a sign that they're uneasy. And she's noted with displeasure that wages aren't going up very fast.

GREENE: Now David, this is a particularly important time to diagnose the job market, it sounds like. Remind us why that is.

WESSEL: Basically, the Fed is trying to figure out what is going on now and what - it doesn't want to act too soon because that would choke off the recovery, but it doesn't want to act too late, as it often does. And basically, there are some people who say this is like the 1970s, when the Fed waited too long, we got a lot of inflation. Others look at the same economy and say it's like 1937, when the Fed and Roosevelt misread the economy and hit the brakes prematurely.

One of the keys to deciding what the right historical metaphor is, is how much slack there is in the labor market.

GREENE: All right. David, thanks as always.

WESSEL: You're welcome.

GREENE: He's director of the Hutchins Center for Fiscal and Monetary Policy at the Brookings Institution and a contributor to the Wall Street Journal.

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