FRB-SF Study: Fed Boosting Jobless Rate!

Today’s FRB-SF Economic Letter features an article titled, “Uncertainty and the Slow Labor Market Recovery,” written by two of the bank’s economists. In their study, they use a measure of fiscal and monetary policy uncertainty constructed using the volume of newspaper articles discussing economic policy uncertainty, the number of tax code provisions scheduled to expire, and the extent of disagreements among economic forecasters about such variables as future levels of inflation and government spending. The sharp increase in this measure since 2007 coincides with the rightward shift in the Beveridge Curve, which shows the inverse relationship between the job openings rate and the unemployment rate. Since 2007, the unemployment rate has been higher than in the past at the same job openings rates.

The authors dismiss the notion that a mismatch between the skills unemployed workers have and what employers are looking for can explain the shift in the Beveridge Curve. They also don’t buy the idea that the expansion of unemployment insurance benefits can account for the shift, noting that “unemployment insurance benefits have been reduced substantially over the past two years.” Here is their startling finding:

As the figure shows, policy uncertainty did not contribute to the shift in the Beveridge curve from December 2007 to August 2009. However, beginning in autumn 2009, policy uncertainty became an increasingly important factor behind the shift in the Beveridge curve. By the end of 2012, heightened policy uncertainty accounted for about two-thirds of the shift. Our results suggests that, in late 2012, if there had been no policy uncertainty shocks, the unemployment rate would have been close to 6.5% instead of the reported 7.8%.

The policy uncertainty measure includes uncertainty about monetary policy. Could it be that the Fed’s constant tweaking of its ultra-easy monetary policy, including all the discordant chatter from members of the FOMC, has contributed to the stubbornly high unemployment rate? That certainly is the implication of this study coming out of one of the most respected research departments in the Fed’s system! The unemployment rate would be down to 6.5% by now if not for all the policy uncertainty.