AD or AS?
By Arnold Kling
Minneapolis FRB President Narayana Kocherlakota says,
I mentioned that the relationship between unemployment and job openings was stable from December 2000 through June 2008. Were that stable relationship still in place today, and given the current job opening rate of 2.2 percent, we would have an unemployment rate of closer to 6.5 percent, not 9.5 percent. Most of the existing unemployment represents mismatch that is not readily amenable to monetary policy.
Stephen Williamson has further comments. I will say more below the fold.The first thing to point out is that Kocherlakota might be making the relationship between vacancies and unemployment sound more precise and well established than it really is. How can one rule out non-linearities that would make the current combination of vacancies and unemployment seem quite normal? What sort of confidence interval should one draw around the predicted unemployment rate of 6.5 percent?
What other macroeconomic relationships are out of whack? Okun’s Law, relating the unemployment rate to GDP, is not working correctly. We are getting stronger output growth than employment growth, which suggests that the job openings are not for end-stage production workers.
There are some unfilled vacancies (fewer than during a boom, but more than one would expect in a deep recession), but these are not adversely affecting output. One way to read the numbers is that we are in a Garett Jones, or Labor is Capital economy.
However, if you look at where the openings are, there is a hint that it is production workers that are in demand. In the JOLTS data, the total private job opening rate (job openings divided by employment plus openings) was 2.3 percent in June, compared with 3.6 at the pre-recession peak and 1.9 at the trough. In manufacturing, the job opening rate was 1.9 percent in June, compared with 2.7 at the pre-recession peak and 0.9 at the trough. Relatively speaking, manufacturing has bounced further off its trough than the rest of the private sector. This view is supported by the manufacturing workweek of 41.1 hours for production and nonsupervisory workers supports, just 0.3 hours less than the pre-recession peak.
What about the Phillips Curve? I am not an expert on Phillips Curves. However, starting from a past inflation rate of about 2 percent, wouldn’t a standard Phillips Curve be predicting that an unemployment rate of 9.5 percent would be sending inflation well below zero? If that is what such an equation would predict, and we are not seeing it, that might be another sign that there is a labor matching problem.
The vacancy rate and the inflation rate may tell us that aggregate demand is not as weak as the unemployment rate might suggest, and instead we have more of a matching problem (yes, the Recalculation Story). Fine, but I still think that the state of aggregate demand is far from satisfactory. Even though I share some of Kocherlakota’s pessimism about the ability of monetary policy to bring down the unemployment rate, I think that the Fed should be making more of an effort to fight the recession. Even if you doubt that it would work, it seems a shame not to try.