+

Cookies on the Business Insider India website

Business Insider India has updated its Privacy and Cookie policy. We use cookies to ensure that we give you the better experience on our website. If you continue without changing your settings, we\'ll assume that you are happy to receive all cookies on the Business Insider India website. However, you can change your cookie setting at any time by clicking on our Cookie Policy at any time. You can also see our Privacy Policy.

Close
HomeQuizzoneWhatsappShare Flash Reads
 

FED PAPER: Washington Is Keeping Nearly 2 Million People Unemployed

Jul 23, 2013, 00:52 IST

Fed Chairman Ben Bernanke consistently blames Congress, and its inability to enact meaningful tax and spending reforms, for the economy's ongoing sluggishness.

Advertisement

According to a new paper from the San Francisco Fed (as observed by the NYT's Catherine Rampell), this is not just talk.

In "Uncertainty and the Slow Labor Market Recovery," researchers Sylvain Leduc and Zheng Liu write that policy uncertainly has held back the U.S. unemployment rate by 1.1 points.

In other words, if it weren't for Washington dithering, we'd now be at about 6.5%, instead of 7.6% (the paper says 7.8%, which may simply reflect the rate at the time it was being wr7.6/11.8itten).

Here's how it all works.

Advertisement

This is the Beveridge curve, which plots the unemployment rate against how quickly job openings are being created.

San Francisco Fed

Since the recession, the curve has left its expected course of more openings/less unemployment, and now reflects a sluggish improvement unemployment rate even as job openings recover.

Next, the authors take a look at the "Beveridge curve shifter" rate, or how far off track the curve has gone from its expected course.

They plot that against a policy uncertainty index, a previously developed model that incorporates "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."

Advertisement

Through the reference period, the policy uncertainty index climbed substantially, and almost uniformly with, the curve shifter rate:

San Francisco Fed

Also of note: the recruiting intensity index, which captures the pace of new hires, has fallen off since the recession.

This all leads to the final chart, showing where the Beveridge curve would be without all that uncertainty: about 6.5%.

San Francisco Fed

Advertisement

They write:

...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 current absolute number of unemployed Americans is 11.8 million. Simple algebra says that at 6.5%, that figure would instead be about 10.1 million — meaning dithering has prevented about 1.7 million people from getting jobs. Assuming less uncertainty encourages higher labor force participation, that absolute number could be even higher.

Thanks a lot, Washington.

You are subscribed to notifications!
Looks like you've blocked notifications!
Next Article