* Risk that recession permanently changed labor market
* Economists worry Fed may not have much more room to boost
employment
* Concerns over 40 pct of unemployed who are long-term
jobless
By Jonathan Spicer and Lucia Mutikani
NEW YORK/WASHINGTON, April 8 (Reuters) – Gary Feeman has
been searching for a job for 16 months. He’s not ready to give
up just yet, but the 60-year-old worries he is running out of
options.
Feeman is among the more than 5 million Americans who have
been out of work for more than six months and who represent the
heart of the crisis in the labor market.
Their plight also poses a warning that U.S. unemployment may
not drop back to its pre-recession levels and could be stuck
higher than many policymakers expect.
Feeman, from Lancaster County, Pennsylvania, has sent out as
many as 100 resumes. But the former maintenance director at a
small amusement park in the area, has had only one interview in
person. That was in January.
“I have tried everything under the sun,” he said. “The
frustrating thing to me is that when you apply for a job,
employers do not respond either way.”
One of the biggest challenges facing U.S. Federal Reserve
Chairman Ben Bernanke and his colleagues is to understand
whether people like Feeman will eventually find work once the
economy gathers enough speed.
Bernanke appears to think they will and he has suggested
more stimulus by the Fed might be needed to kick-start demand,
and job creation, into a higher gear.
But if he’s wrong, the central bank risks pumping too much
money into the economy in an effort to help people who have
become unemployable. Rather than bringing down the jobless rate,
the Fed could eventually fuel higher inflation.
“We’re living through a juncture in U.S. policy history in
which we’re making major decisions about what type of society
we’re likely to be,” said Steven Davis, an economist at the
University of Chicago. “Those decisions will affect things for a
generation.”
Some 40 percent of the nation’s unemployed have been out of
work for more than six months. That’s over twice the rate of
long-term unemployment just before the 2007-2009 recession.
Bernanke mostly pins long-term joblessness on weak demand
from American consumers and companies. In late March, he pointed
to data showing that, compared to before the recession, the
short-term unemployed also are taking much longer to find work.
This, he argued, justifies the Fed’s policy of keeping
interest rates low to help the economy. Persistent long-term
unemployment is a risk because it might some day make people
unemployable, he said.
“If progress in reducing unemployment is too slow, the
long-term unemployed will see their skills and labor force
attachment atrophy further, possibly converting a cyclical
problem into a structural one,” Bernanke told a conference of
economists.
Long-term unemployment has other costs for the economy. A
paper for the Brookings Institution, a Washington think-tank,
finds that men who lose their job when the unemployment rate is
above 8 percent forfeit twice as much in future earnings than if
had they lost their job when the rate was below 6 percent.
Still, a number of private economists argue there are signs
the structural unemployment problem is already larger than
Bernanke would acknowledge.
WALL STREET MORE GLOOMY THAN THE FED
Most Fed policymakers think the jobless rate could fall to
somewhere between 5.2 and 6 percent before the economy heats up
enough to fuel inflation. That’s a higher “natural” unemployment
rate than the roughly 5 percent rate estimated by most Fed
policymakers three years ago.
Many private sector economists have shifted their estimate
of the natural rate even higher. Credit Suisse pegs it at around
6.5 percent, and UBS at near 7 percent.
“If that is the case the Fed will run out of effectiveness
much sooner than they realize,” said Adolfo Laurenti, deputy
chief economist at Mesirow Financial, in Chicago. He estimates
the natural rate at between 6.5 and 7 percent.
Some economists see signs of an increase in the natural
jobless rate in the widespread mismatch between job openings and
the qualifications of those seeking work.
In U.S. manufacturing, for example, more than 600,000 jobs
are unfilled because of a lack of skilled applicants, according
to a study by Deloitte and the Manufacturing Institute.
Many of the companies that are hiring are turning
increasingly to younger workers with more up-to-date skills
training, rather than taking a chance on people who have been
out of work for a long time.
In Kentucky, a construction firm responded to the recession
like most of its rivals: from 2008 to 2010, Gray Construction
cut 51 of its total of 245 employees. As signs of growth
returned to the economy, it started hiring again, with a focus
on college graduates with specialized degrees.
“There has to be a very compelling reason to take somebody
who was not in the industry, who has changed over to the
industry, versus somebody who graduated with an engineering
degree or construction management degree,” said president and
chief executive Stephen Gray.
Another possible source of a run-up in the natural jobless
rate is that firms are relying more and more on automation
technology. Workers untrained in using that technology could
struggle to get jobs.
Some economists think long-term unemployment is also kept
high because many workers can’t move to find work because they
owe more on their mortgages than their homes are worth.
“I don’t think people have fully appreciated how deep the
hole is,” said Michael Greenstone, an economist at MIT
university and former chief economist at the White House’s
Council of Economic Advisers. “The Great Recession is going to
be living in our collective homes for many more years to come.”
The Fed has bought $2.3 trillion in securities and kept
interest rates near zero for over three years to aid the economy
and fight the sharpest jump in unemployment since World War Two.
So far it has helped to bring the jobless rate down from 10
percent in 2009 to 8.2 percent in March, although many of the
unemployed have become so demoralized that they have left the
formal labor force.
If some economists are right to believe the natural
unemployment rate is as high as 7 percent, then the Fed could
hit a wall before long and need to tighten monetary policy.
Minneapolis Fed President Narayana Kocherlakota – one of the
policymakers at the Fed who suggests rates will have to rise
sooner than later – thinks last year’s rise in inflation was a
sign the Fed is approaching that wall.
“There’s a point at which it gets to be very costly in terms
of how much inflation you’d have to generate in order to get a
reduction in unemployment,” Kocherlakota said last month.
Such predictions are grim for construction workers like
Mfthel, 36, who most days sits on a plastic crate at an
intersection in Brooklyn, New York, waiting for casual work – as
he has done most days since the recession hammered his industry.
Mfthel, who declined to give his family name, and some of
the other dozen men waiting on the street corner with tools and
steel-toe boots said they had permanent jobs before the
construction boom ended. Now they can expect $7 to $10 an hour
for repairing buildings, moving furniture and paving driveways.
“Now they don’t come or they don’t pay enough,” he said.
“You can’t do much with 20 bucks.”
(Additional reporting by Ann Saphir; Editing by Frances Kerry)
