Sunday, August 31, 2014

Jackson Hole fall-out

Walked through all of the Jackson Hole papers and came to the conclusion is that theme of labor markets was very appropriate at this time and that all said the conflicting evidence between cyclical and structural issues are real. Yet, the take away from all of these papers is that labor markets are going through structural change and credit policies may not solve all the problems seen on the Yellen dashboard. Simply put, labor problems cannot be solved through monetary policy alone and going it alone may have major negative ramifications.

However, if you believe in the precautionary principle for making decisions, it may not make sense to raise rates and be the Fed Chairman who stopped the poor recovery. (One could argue that the precautionary principle could be a good reason to raise rates but that is for another discussion.) The bias still seems for a delay in a rate increase given there is the continued counter-factual view that if a zero rate with QE was not tried the economy could be worse off.

The complexity of labor markets was presented in all of the papers. For example, the Davis Haltiwanger paper on labor fluidity suggests that labor markets are changing because there is less mobility. There is less reallocation and churn in jobs which makes for higher unemployment for the young, old, and marginal worker. This is a structural issue.

Autor provides an analysis of real wages which suggests that the flattening of wage growth began before the financial crisis which again suggests a structural issue.The exception was for those with advanced degrees.

The panel on demographics reported evidence that again the employment problem is structural. However, Song and von Wachter provide an interesting study that suggests that the long-term unemployment in the Financial Crisis may not be dissimilar for other recessions. This may suggest that counter-cyclical policies have and can work to alleviate labor  problem. Bertola presents evidence on labor elasticities across countries and show sthat labor rigidities have an important impact on employment levels.

The stories are all of the same. The labor markets are complex and the transmission between monetary policy and hiring is not clear.

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