MNI INTERVIEW: Hot Economy Benefits Don't Last - Fed Economist

--Costs Of "High Pressure" Economy May Outweigh Short-Term Labor Market Boost

By Jean Yung

     WASHINGTON (MNI) - Running the economy hot for a period can reverse some

damage from a recession by bringing disadvantaged workers back into the job

market, but much of these gains slip away in subsequent downturns, Federal

Reserve Bank of Atlanta economist Julie Hotchkiss, author of new research on the

topic, told MNI in an interview.

     Her findings suggest the social benefits of letting the unemployment rate

fall to ultralow levels may not endure long enough to outweigh other side

effects of easy monetary policy, including financial instability and higher

inflation.

     "There's an ongoing debate about how aggressive the Fed should be in their

accommodative stance," Hotchkiss said, speaking to MNI last week. "On the one

hand we find that there are benefits (to running a hot economy), and that

disadvantaged workers benefit more. On the other hand, the benefits are not

enough to carry them through and close that gap" over time.

     --'HIGH-PRESSURE' ECONOMY

     Hotchkiss's research examines the labor market dimension of a question

posed by former Fed Chair Janet Yellen in 2016 -- whether temporarily running a

"high-pressure economy" could heal some of the lingering effects of the great

recession of 2008-2009.

     Hotchkiss and co-author Robert Moore argues that it does.

     As employers dig deeper into the labor pool in a very robust market, people

who have been out of work for some time are more likely to find employment,

repair weakened skill sets and remain in the workforce longer as a result, they

argue.

     Data lend support to that theory. A decade into the expansion with the U.S.

unemployment rate at a 50-year low, jobless rates of blacks, Hispanics,

lower-income and rural workers have fallen more dramatically than that of the

nation as a whole, reversing the outsized increases that those groups

experienced after the crisis. Gaps in labor market participation rates have

narrowed as well, with black participation lagging whites by just 2 percentage

points in September.

     --BENEFITS ONLY TEMPORARY

     Unfortunately, data also show these benefits do not extend significantly

beyond boom times, Hotchkiss said.

     Whether one looks at the unemployment rate, labor participation rate, wages

or hours worked, the gap between black and white workers narrows as recoveries

continue but never quite closes before a subsequent recession delivers a fresh

setback for African Americans.

     "Even though disadvantaged groups get a bigger boost, when you combine that

with labor market outcomes being hit harder, the net effect is still a worse

labor market outcome," she said.

     "That suggests that a high-pressure economy is not very effective at

closing that gap as a policy tool."

     --MAXIMUM EMPLOYMENT

     Fed policymakers have in recent months broadened their policy debate to

examine how labor market disparities undermine their maximum employment goal.

Even with the unemployment rate nearly a point below the FOMC's estimate of its

natural rate, a minority argues there is slack left in the labor market.

     But Hotchkiss's findings suggest that letting the labor market overheat may

not be the most effective way to encourage broader labor participation.

     "This research tells me we ought to guard against letting the economy slip

too far into these high-pressure periods that ultimately impose heavy costs on

many people across the economy," Atlanta Fed President Raphael Bostic recently

commented.

     "Facilitating a prolonged period of low -- and sustainable -- unemployment

rates is a far more beneficial approach."

--MNI Washington Bureau; +1 202-371-2121; email: jean.yung@marketnews.com

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