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Tags: Fed | Kocherlakota | job | market

Fed's Kocherlakota: Central Bank Can't Cure Job Market Alone

Wednesday, 23 May 2012 03:19 PM EDT

Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said the Fed probably can’t repair all the damage to U.S. employment from the credit crisis and fiscal policy could help to revive the job market.

The Federal Open Market Committee “faces an especially large amount of uncertainty about the level of maximum employment that it can hope to achieve,” Kocherlakota said Wednesday according to remarks prepared for a speech in Rapid City, South Dakota. In addition, “the FOMC has no control over” factors that influence the jobless rate like tax policy.

U.S. policy makers believe non-monetary factors such as demographics and regulatory policy limit their ability to meet their congressional mandate to achieve maximum employment with price stability. Kocherlakota has said that, even with an 8.1 percent jobless rate, the central bank may be nearing the maximum employment level attainable without spurring inflation.

“Even if employment is close to the maximum level that is achievable using monetary policy, there may well be nonmonetary policy levers that could be used to raise employment still higher,” Kocherlakota said. One tool would be a cut in the payroll tax paid by employers.

“Such a move would provide an additional incentive to employers to hire more workers (albeit at the cost of increasing the deficit), and increase employment and reduce unemployment,” he said.

Kocherlakota’s speech was similar to remarks in Minneapolis on May 10, when he said central bankers should “contemplate the possibility that the erosion in labor market performance that we’ve seen in the United States over the past five years may be highly persistent, even under appropriate monetary policy.”

Affirmed Plan

The FOMC in an April 25 statement affirmed a plan to keep its main interest rate near zero through at least late 2014, citing “elevated” joblessness.

Accelerating inflation is “a signal that our country’s current labor market performance is much closer to ‘maximum employment,’ given the tools available to the FOMC, than the post-World War II U.S. data alone would suggest,” Kocherlakota said Wednesday.

Employers added 115,000 jobs in April and the unemployment rate fell to 8.1 percent, according to a Labor Department report. Economists in a Bloomberg Survey expect the report for May, which will be released June 1, to show 150,000 jobs were added as the unemployment rate stays at 8.1 percent.

Kocherlakota said a higher level of U.S. unemployment may prove permanent, if the history of Sweden’s economic crisis two decades ago is any guide.

The Scandinavian nation’s “highly effective” response to the financial, banking and currency crisis of 1991 to 1993 wasn’t enough to prevent a “persistent effect” on the labor market, Kocherlakota said. The shift in the level of unemployment compared with job openings never returned to 1990 levels, he said.

© Copyright 2023 Bloomberg News. All rights reserved.

Wednesday, 23 May 2012 03:19 PM
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