MNI INTERVIEW: Fed Can Cool Economy With Modest Job Losses

The Federal Reserve can cool the economy without putting millions out of work because the overwhelming majority of post-pandemic job openings aim to poach workers rather than hire from the pool of jobless, so even a large overall decline in vacancies as interest rates increase would add only modestly to unemployment, St. Louis Fed economist Paulina Restrepo-Echavarria told MNI.

In new research with co-author Dallas Fed economist Anton Cheremukhin, Restrepo-Echavarria argues the response of unemployment to a slowdown in demand for workers has likely decreased in recent years, because poaching vacancies have outpaced job openings with the potential to determine the unemployment rate.

Vacancies for the employed have risen steadily since 2015 and accelerated since Covid-19 to more than three-quarters of all posted openings from roughly half in the decade prior, they estimate, while monetary policy is thought to have an equal effect on both.

"Monetary tightening could lead to a relatively large decline in job openings, but a drop in vacancies for the already-employed has no bearing on the Beveridge curve -- it doesn't generate unemployment," she said in an interview. "We might not see a big effect of tighter policy on unemployment. So the idea of a soft landing may actually be possible." (See MNI INTERVIEW: Fed Cheers Cooling Labor Demand As Openings Dip)

DUAL BEVERIDGE CURVE

Since Covid-19, the behavior of the Beveridge curve, which plots the relationship between the vacancy and unemployment rates, has been strikingly different from past recessionary episodes, puzzling economists. Some have attributed the breakdown to shifts in hiring to different sectors, while others have blamed a larger retiree pool.

But by dividing vacancies into the two group, the Fed economists come up with dual Beveridge curves, of which the one for unemployed workers closely resembles Beveridge curves of the past.

"That unusual pattern is all due to vacancies for the employed. Once you remove that, it looks the same as it always looked," Restrepo-Echavarria said.

Though it's difficult to discern from a job ad whether an employer wants to hire an unemployed worker, therefore making it impossible to prove their theory, Restrepo-Echavarria added that recruiters say firms often make that decision at the outset.