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Unemployment - Feds Key Variable Harder to Read

Unemployment - Feds Key Variable Harder to Read

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Published by Swedbank AB (publ)
Unemployment - Feds Key Variable Harder to Read
Unemployment - Feds Key Variable Harder to Read

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Categories:Types, Business/Law
Published by: Swedbank AB (publ) on Jan 20, 2014
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Strategy and Macro Research
 Large Corporates & Institutions
1 of 3
Macro analysis
 20 January 2014
Macro focus
Unemployment -
Fed’s key policy variable harder to read
Central banks face new challenges as the economy recovers
The financial crisis masked structural imbalances on the labour market
Polarised labour markets affect infla-tion and productivity
Digitalisation, urbanisation, and internationalisation are shifting the drivers of economic growth and rapidly changing the structure of labour markets around the world. Research shows that innovation and productivity growth are, to an increasing extent, concentrated in dynamic regions.
 These regions are characterised by cutting-edge universities, high-skilled labour forces, and cultural diversity. The result is an accelerating diver-gence between highly educated and low skilled work-ers, between dynamic clusters and stagnating regions, and between countries that can meet the demand from technological change and those that cannot. These trends affect the demand for labour, productivity, and inflation. In this analysis, we discuss how these trends have affected labour markets during the financial crisis, and the challenges facing central banks during the re-covery. Technology is driving a momentous shift in the US la-bour market
The most innovative dynamic clusters are still located in the US. Top research universities, access to venture capital, and a steady increase of high-skilled labour have contributed to the success of technology start-ups in Silicon Valley and life sci-ence companies in Boston. In the US, there is a vibrant debate in academia and among policymakers on how digitalisation and internationalisation affect labour markets and economic growth.
 Research shows that the US labour market is un-dergoing a momentous shift.
 Technology and innovation have increased the demand for high-skilled labour, while the demand for low-skilled labour has been declining. Data show that real wages, i.e., wages adjusted for inflation, have for employees with advanced degrees improved by 32% since 1980. At the same time, real wages for white, male high school graduates are 8 percent lower today than in 1980 (see Table 1). The diverging trend in incomes between the high-
See e.g., Moretti (2013). The New Geography of Jobs.
See, e.g., Moretti (2013), Gordon (2013), Brynjolfsson (2013)
See e.g., Moretti (2013). The New Geography of Jobs.
skilled and the low-skilled has resulted in a higher degree of income inequality.
Source: Moretti (2013). Data include all full-time workers aged 25-60
Striking unemployment divergence in Sweden
In Sweden, the same trend is observed: increasing demand for high-skilled labour and declining demand for low-skilled labour. As in the US, wages are diverging (see Table 2). In addition, further analysis of Swedish data reveals that unem-ployment is increasingly concentrated among low-skilled workers (see graph 1). Almost 70% of unemployed are those with weak links to the labour market. The unemployment rate amongst university-educated employees in Sweden has trended around 5% in the past 10 years, compared with an unemployment rate approaching 20% amongst employees without a high school degree. It is noteworthy that this trend has continued throughout the financial crisis and the ensuing euro zone crisis. Traditional Swedish manufacturing, which is highly dependent on exports, has been severely hit by low demand from the rest of the world. Despite these recent cri-ses, the demand for high-skilled labour has remained strong, while it is increasingly difficult for less educated workers to find employment.
Source: Statistics Sweden (2013).
Table 1: Hourly average wage of men in the United States, by education (2011 dollars)
1980 2010 Percent Change
13.7 11.8 -14%
High School
16.0 14.8 -8%
21.0 25.3 +20%
Advanced Degree
24.9 33.1 +32%
Table 2: Monthly average wage in Sweden for women, by education (2009 kronor)
1991 2009 Percent Change
Less than 9 years
15406 20948 +36%
9 years
15336 22104 +44%
High School
16074 23288 +45%
Na 29069 Na
Advanced Degree
25275 40634 +61%
Macro focus
2 of 3
Strategy and Macro Research
 Large Corporates & Institutions
Central banks face new challenges
The boom years before the financial crisis masked structural imbalances on the labour market. Due to continued process automatisation, manufacturing is not going to return as an important source of employment growth as the economy recovers. The high unemployment rates following the finan-cial crisis in the US, as well as in Europe, are partly structural and driven by technological change. The level of resource utilisation on the labour market may not be as low as it seems. In particular, unemployment is increasingly
concen-trated amongst low-skilled workers as they struggle to meet the demand from a changing labour market. As the economic recovery takes hold, this divergence in the labour market will become even more pronounced.
As a result of polarized labour markets Federal Reserve will face new challenges
High demand for high-skilled labour will push up wages and risks causing wage inflation, and the need for tighter monetary policy. At the same time, unemployment will remain elevated amongst large groups of the population, creating pressure for a continued expansionary monetary policy. If unemployment among low skilled workers is struc-tural, rather than cyclical, more expansionary monetary poli-cy will not be sufficient to achieve full employment. In addi-tion, if structural unemployment has increased, employment growth will become a driver of inflation at higher levels of unemployment than previously thought. Federal Reserve has repeatedly raised the issue of structural versus cyclical un-employment. In the latest FOMC minutes (December 2013),
they note “reports of labor shortages, particular for workers with specialized skills”. They also raise concern for “the risk
that the persistent weakness in the labor force participation rate and low rates of productivity growth might indicate
lasting structural damage”. This dilemma facing central banks
will be particularly strong in the US, where the Federal Re-serve has a dual mandate to achieve maximum employment and to stabilise inflation.
Data show that the Swedish Riksbank faces a similarly polar-ised labour market
. As a result, it will be increasingly difficult to analyze inflationary pressures. Inflationary pressures de-pend on the firms marginal costs (such as wages, import pric-es and productivity), and the extent to which it can pass on costs to consumers (which depend on competition and de-mand). Swedbank forecasts that Swedish inflationary pres-sures will remain subdued during 2014. As growth picks up and labour markets improve in 2015, we expect a gradual increase in wages, particularly for high-skilled workers. Swe-dish companies will face cost pressures, but will find it diffi-cult to pass on the costs to consumers due to tough competi-tion from our main trading partners, in particular in the euro-zone, where wage increases will remain subdued for an ex-tended period of time. In addition, digitalisation and more competition
in product markets reduce firms’ ability to i
n-crease prices. E-commerce, and the increased internationali-zation of retail, is contributing to fierce price pressures. High productivity growth could reduce unit labour costs and inflationary pressures. Digitalisation and technological inno-vation mean that the potential for productivity gains is large. 3D-printers, big data analysis and further process automati-sation can increase the overall level of productivity in the economy. Still, given the shortage of people in the labour market who can meet the technological demands, productivi-ty growth is likely to be subdued. The interplay between a changing labour market, productivity and inflationary pres-sures will be central to monetary policy during the recovery. There are three key variables to watch in the coming months to understand Fed
response to subdued inflation and poten-tial revisions to forward guidance:
Participation rates.
 Unemployment falling due to employment growth is sign of a healthy recovery, while further declining participation is a sign of structural weaknesses.
Wage increases 
. To understand inflationary pres-sure from wages, wage growth by industry and by education level is central.
. A shortage of skilled labour and a growing services sector may dampen productivity growth and contribute to a rebound in inflation. Analysts Anna Breman, Anna Felländer and Laura
Graph 1: Unemployment by education, Sweden 2005-2013
9 yearsHigh SchoolCollegeSource: National Institute of Economic Research (2013). Unemployed aged 15-74

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