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Cyclical unemployment caused by slack in the labor market

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Janet Yellen, Chair to the Federal Reserve in her speech at the 2014 National Interagency Community Reinvestment Conference, in Chicago, Ill acknowledged today’s national unemployment at 6.7 percent remains higher than during the 2001 recession and explained the type of unemployment experienced today post the financial crash of 2008 is due to slack in the labor market.

Slack means that there are significantly more people willing and capable of filling a job than there are jobs for them to fill. During a period of little or no slack, there still may be vacant jobs and people who want to work, but a large share of those willing to work lack the skills or are otherwise not well suited for the jobs that are available.

One form of evidence for slack is found in other labor market data, beyond the unemployment rate or payrolls, some of which I have touched on already. For example, the seven million people who are working part time but would like a full-time job. This number is much larger than we would expect at 6.7 percent unemployment, based on past experience, and the existence of such a large pool of "partly unemployed" workers is a sign that labor conditions are worse than indicated by the unemployment rate.

A second form of evidence for slack is that the decline in unemployment has not helped raise wages for workers as in past recoveries. Workers in a slack market have little leverage to demand raises. Labor compensation has increased an average of only a little more than 2 percent per year since the recession, which is very low by historical standards.

A third form of evidence related to slack concerns the characteristics of the extraordinarily large share of the unemployed who have been out of work for six months or more. These workers find it exceptionally hard to find steady, regular work, and they appear to be at a severe competitive disadvantage when trying to find a job.”

Yellen’s last piece of evidence of slack has been low participation rate in finding a job. The concern for the long term unemployed that have dropped out or given up looking for work are likely discriminated against despite experience and skills.

The recovery still continues and serves as a reminder that it is time for a career change for the long-term unemployed. Less experience may mean lower pay, yet it is a path towards employment.

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