MNI INTERVIEW:No History Of Sustained Tight Labor Mkt-Fed Econ

--If Labor Market Is Tight, It Is Unlikely To Remain That Way For Long

--"Disadvantaged Workers" Lose Advantages Gained When Tight Labor Market Ends

By Sara Haire

     WASHINGTON (MNI) - Disadvantaged workers have returned to the labor market

in record numbers in the wake of the Great Recession, but research out of the

Federal Reserve Bank of Cleveland suggests that any benefits those workers

gained in a tight labor market they would "lose in a loose market" Bruce

Fallick, a senior VP and research economist explained in an interview with MNI.

     The research done by Fallick and his colleague, Pawel Krolikowski also

showed that once a tight labor market loosens, the employment-to-population

ratio (e/p) for these workers dissipates in following years.

     While there has been an argument to keep rates low to further tighten the

labor market in order to help continue to mend the deep wounds left by the Great

Recession, Fallick's research suggests that "tight periods are not a way to

create a lasting benefit" for these "disadvantaged workers."

     The finding is consistent with Fed Chair Jerome Powell's sentiment that

while the Fed is "uncertain" whether the economy is at full employment, the best

path still remains to slowly raise the target range so as to circumvent any

potential overheating, as he said in April to the Economic Club of Chicago.

--TIGHTNESS WILL END

     The unemployment rate's decline to 3.9% in April has spurred on discussions

of whether the natural rate of unemployment is lower than previously thought and

for how much longer can it be sustained.

     "We have not, in our history been able to keep a tight labor market going

forever," Fallick explained. Certain estimates show the current labor market is

"not dissimilar to the situation in the late '90s," which was considered to be

the tightest labor market since the 1960s, he said.

     There is no "definitive answer for" how much lower the unemployment rate

can go, Fallick pointed out.

--NO MORE WOUNDS?

     It has been proposed by a few economists that it may necessary to keep

rates low as the labor market has slack left and there is still some damage from

the 2008-09 crisis that needs to be mended. This was an idea that previous Fed

Chair Yellen made waves with when she proposed in 2016 that the Federal Reserve

may have to run a "high-pressure economy" to continue to mend the wounds from

the recession.

     However, she later clarified that she thinks allowing the economy to run

persistently hot would be "risky and unwise," something current Chair Jay Powell

has echoed.

     Keeping rates low in order to repair the damage done by the great recession

and run a so-called "high-pressure economy" may help the broader economy for a

time, but these displaced and lesser educated workers would experience

"symmetric effects," Fallick said, meaning whatever was gained would be lost in

the long-run.

--LITTLE LASTING BENEFIT

     In their working paper "Hysteresis in Employment among Disadvantaged

Workers," Fallick and Krolikowski focused on effects on "prime age men" employed

in 29 of the largest states with no more than a high-school diploma.

     They found that following the 2001 recession there was a net positive for

the e/p for disadvantaged workers. However, following the 2009-09 recession

there has been a larger, negative effect according to data up until 2016.

     Fallick explained that following a loosening after a tight labor market,

any soft skills and personal connections gained subside in subsequent years.

     They also examined what would be the effects following a "high-pressure"

labor market that slowly drifted back to sustainable levels of unemployment

without a recession.

     Once the unemployment rate stabilized, they found little difference in the

e/p in a "soft-landing" compared to a post-recession, also seeing "no lasting

effect" on the e/p of the disadvantaged workers.

--MNI Washington Bureau; +1 212-800-8517; email: sara.haire@marketnews.com

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