What does this change in the relationship between job openings and unemployment connote? In a word, mismatch. Firms have jobs, but can’t find appropriate workers. The workers want to work, but can’t find appropriate jobs. There are many possible sources of mismatch—geography, skills, demography—and they are probably all at work. Whatever the source, though, it is hard to see how the Fed can do much to cure this problem. Monetary stimulus has provided conditions so that manufacturing plants want to hire new workers. But the Fed does not have a means to transform construction workers into manufacturing workers.
Of course, the key question is: How much of the current unemployment rate is really due to mismatch, as opposed to conditions that the Fed can readily ameliorate? The answer seems to be a lot. I mentioned that the relationship between unemployment and job openings was stable from December 2000 through June 2008. Were that stable relationship still in place today, and given the current job opening rate of 2.2 percent, we would have an unemployment rate of closer to 6.5 percent, not 9.5 percent. Most of the existing unemployment represents mismatch that is not readily amenable to monetary policy.
Given the structural problems in the labor market, I do not expect unemployment to decline rapidly. My own prediction is that unemployment will remain above 8 percent into 2012...
Take a 5% old natural rate of unemployment, add 3 percentage points to it, and get 8%.
So Christy Romer writes:
High Unemployment Is Not a New Normal: Before the recent recession, in the view of many economists, the lowest sustainable rate of unemployment in the United States — a level known as the normal or natural rate of unemployment — was around 5 percent. The turmoil of the last few years, however, has shaken up the economy. Is it possible that it has affected the natural rate of unemployment — increasing it to 8 or even 9 percent? Such a climb would imply that the prospects for a rebound in output and employment have been greatly reduced — and that high unemployment would be our new normal.
And then along comes Stephen Williamson to say:
Stephen Williamson: New Monetarist Economics: Christina Romer, Part III: I know this will confirm Tim Duy's view that I pick on Christina Romer for no good reason.... Apparently Romer is now... contribut[ing]... to the Sunday New York Times.... Romer seems to be saying that other people are saying that 8 or 9 percent unemployment is the "new normal," i.e. permanent. I may have missed something, but I don't think anyone is saying that.... [T]he "new normal" view, which no one apparently has...
Make friends with Mr. Google, people. Please?