Yellen Shines a Light on Shadow Unemployment
Policy + Politics

Yellen Shines a Light on Shadow Unemployment

REUTERS/Jonathan Ernst

Federal Reserve Board Chair Janet Yellen on Wednesday said that she remains hopeful that many of the long-term unemployed, as well as people who have dropped out of the labor market completely, will eventually be drawn back in as the economy improved. She conceded, however, that there may be some degree of “permanent damage” to the labor force from the Great Recession.

Yellen made her comments about the unemployment situation in her post-Federal Open Markets Committee press conference. The news out of the FOMC itself was not terribly surprising. The members of the board downgraded their predictions for GDP growth this year to reflect the economy’s poor performance in the first quarter. As expected, the committee also voted to continue tapering off on the central bank’s purchase of mortgage backed securities and Treasury securities, which would fall to $35 billion as of July.

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The members reiterated their expectation that they will keep interest rates low for some time to come, with half projecting rates at or below one percent at the end of 2015. 

Yellen’s comments on unemployment came in the context of a discussion of “slack” in the labor market – an issued very much in debate among economists at the moment. Many believe that a large number of those who have left the workforce are so detached from the job market that they are no longer a significant force in holding down wage growth.

For her part, Yellen conceded that the longer someone is removed from the labor force, the more difficult it is for them to return. However, she said, “My hope would be, and my expectation is, that as the economy recovers we will see some repair of that. That many of those individuals who are long-term unemployed and many of those who are out of the labor force would take jobs if the economy is stronger and would be drawn back in again.” 

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She added, though, “It is conceivable that there is some permanent damage there to them, to their own well-being, their families’ well-being and the economy’s potential.” 

Some decline in labor force participation is inevitable as the population ages, Yellen said. “While I think most of us would agree that there has been and will continue to be secular decline in the labor force for demographic reasons, I think a portion of the decline we’ve seen in the unemployment rate probably reflects a kind of shadow unemployment or discouragement.

“Now, if that’s correct, we may see that as the economy picks up steam and we see further recovery in the labor market that those, let’s call them discouraged workers, will return either to unemployment or employment and as labor force participation begins to stabilize, the unemployment rate will come down less quickly.”

While it may seem odd to root for a slower decline in unemployment, the Yellen scenario would actually be a long-term boon to the overall U.S. economy.

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