Chicago Fed’s Evans Focuses on Long-Term Jobless, Productivity

By Elizabeth Bernstein
Economist
Bureau of Economic Analysis
Department of Commerce

On day two of the Economic Policy Conference, immediately following the breakfast session with Council of Economic Advisers Chair Christina Romer, Chicago Federal Reserve President Charles Evans framed the current economic climate perfectly.  Starting with a brief overview of the fundamentals of the economy, he painted a picture familiar to those in the room.  The state of the economy is looking up, he said on March 9, with most business cycle indicators turning positive.  However, he noted, credit is still restricted, households and businesses are proceeding with caution, and of course, the unemployment rate, a lagging indicator, is much too high.  Expanding on the employment situation, he focused on two important issues:  unemployment duration and the recent rise in labor productivity.   

On the first, he explained how during this recession the average length that someone remains unemployed is approximately seventeen weeks, four weeks longer than any other recession between 1947 and the present.  The implications of prolonged unemployment are drastic.  The immediate effects are clear; a reduction in spending and consumption will occur.  More importantly, Evans pointed out that it has been proven numerous times that lengthy periods of unemployment lead to a permanent reduction in earnings over a life time.  This is a harsh reality when 40 percent of the unemployed have been so for at least six months.            

Secondly, it is no secret that if output is growing albeit slowly, and there is low labor utilization, productivity must increase.  This is why the U.S. economy has experienced the recent productivity surge.  But it remains a matter of debate, as was clear in different sessions throughout the conference, whether these gains are due to progress such as technology improvements or businesses making due with the bare minimum as they implement often severe cost-cutting directives.  The reality is that numerous factors affect hiring patterns and that is why the path for new hires is not clear, Evans said.  If technological progress is causing more of the surge, then hiring will not rebound quickly.  A new skill set will be required and that requires time for training and education.  If resource slack is the main reason, then hiring should resume when businesses can afford to hire again.  For the current state of the economy, most economists would likely hope that resource slack exists.           

Evans believes there is slack in the labor market, stating that the true question is how much slack exists.  With this said, he asked a rhetorical question, “Should the Fed have done more?”  Then he detailed the numerous steps the Federal Reserve did take, such as dropping the effective target federal funds rate to zero, a traditional tool, to pumping liquidity into the banking system with different forms of credit and other nontraditional tools.  He made it clear that, in his eyes, the most effective non-traditional program was the purchasing of assets. As shown by the data, it helped boost fixed business spending and durable good spending, both very important aspects of the economy. 

Evans said that expanding the asset programs would have delivered less bang per dollar spent due to the large role expectations play in the economy.  The amount of confidence restored is not measurable but more programs would have had less of an effect. A solid majority of NABE members surveyed shortly in February of 2009, after the Fed’s supportive measures were enacted thought the central bank’s expanded policies were  “about right.”  As Evans said, “more stimulus comes at a cost,” meaning inflation and, as we all know, everything is a tradeoff.    

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