Federal Reserve Chairman Ben Bernanke said Tuesday that record levels of long-term unemployment will alter the U.S. job market for the worse for the foreseeable future.
Bernanke said at a Senate Budget Committee hearing that the natural rate of unemployment -- or the level of unemployment that results when the economy is supporting as many jobs as it can -- has risen from about four percent in the early 2000s to more than five percent because so many Americans have been out of work for so long. In the process, they have lost skills and have become less likely to return to work.
"We are concerned that over the past few years that there has been some modest increase in the sustainable long-run rate of unemployment," Bernanke said. "I hope Congress will consider ways to address that problem."
Though the unemployment rate fell to 8.3 percent in January, many Americans have stopped looking for work and have therefore been pushed out of the workforce, perhaps permanently. The labor force participation rate fell in January to 63.7 percent -- its lowest level since January 1982.
More than 40 percent of those currently unemployed have been without work for more than six months, Bernanke noted. That's roughly double the share during the housing boom of the early and mid-2000s, he said. That adds up to 5.5 million Americans who have been out of work for six months or more, not to mention three to five million more people who have dropped out of the labor force because they have given up looking for work.
Bernanke said that the Fed's Federal Open Market Committee estimates that the natural rate of unemployment is now between 5.2 and 6.0 percent. The actual unemployment rate in 2006 was just 4.6 percent, and in 2000 it was even lower at 4.0 percent, according to the Bureau of Labor Statistics.
The long-term unemployed are in more danger of experiencing years of unemployment because it becomes steadily harder for a job-seeker to find work the longer they're unemployed. Many employers ask for their applicants to be currently employed, a stipulation President Barack Obama is trying to make illegal. Firms also are less prone to hire the long-term unemployed because of the perception that their skills and professional networks deteriorate while they are out of work.
Bernanke has previously warned about the prolonged economic harm of long-term unemployment. In September the Fed chairman called long-term unemployment a "national crisis."
"This has never happened in the post-war period in the United States," Bernanke said in September. "They are losing the skills they had, they are losing their connections, their attachment to the labor force."
Bernanke said on Tuesday that the Federal Reserve can do only so much to bring down unemployment.
"We're only saying that monetary policy really can't do much to bring unemployment in a sustainable way below those levels," Bernanke said of the natural rate.
Bernanke said that in order to bring down the natural rate of unemployment further, the U.S. government needs to focus on projects that provide the country long-run value, especially those focusing on education, worker skills, and research and development.
"We don't want to build useless monuments," Bernanke said.
With many more people no longer considered part of the workforce, Bernanke said that January's 8.3 percent unemployment rate "no doubt understates the weakness of the labor market in a broader sense."
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