The head of the Federal Reserve Bank of Minneapolis says the U.S. labor market could be stuck in neutral for a protracted period of time.
Narayana Kocherlakota said that is what happened to Sweden following its financial, banking and currency crisis of the 1990s. while Sweden is widely regarded as having handled its financial crisis well, the labor market there remains weak, Kocherlakota, making his remarks Thursday at a gathering of the Economic Club of Minnesota.
At a minimum, Sweden's experience forces us to contemplate the possibility that the erosion in labor market performance that experienced in the United States over the past five years may prove to be highly persistent, even under appropriate monetary policy.
Kocherlakota noted that core inflation, which strips out energy and food, has increased "notably" in the U.S. He suggested that monetary policy may not be able to lower the unemployment rate further without pushing up inflation.
It's possible that policy efforts may do little to spur the sluggish recovery in the nation's labor market. Kocherlakota says one school of economic thought contends the right policies can reverse the deterioration in the labor market, as was the case in other post-recessionary periods.
But he says, another school of thought takes a less sanguine view.
"It says that the post-World War II data do not contain an economic crisis of the kind or magnitude that hit the United States in 2008. Such a crisis could well have a different kind of impact on labor markets than the earlier postwar recessions."
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