WASHINGTON (MNI) – The following is the second and final part of
the full text of remarks by Atlanta Federal Reserve President Dennis
Lockhart Thursday:

In recent months, the U.S. economy has enjoyed especially strong
productivity growth in the business sector (averaging 6 percent per
quarter over the last three quarters versus the long-run average of 2.6
percent). I suspect that much of this productivity growth is of the
second, work-harder type. Many employers reacted to the downturn by
aggressively cutting their workforces, reorganizing remaining workers,
and cutting other costs. They have reacted to the upswing by holding
employment at or near recession levels, seeking efficiencies in supply
chains, investing in labor-saving automation, and generally tweaking
their business models to operate more efficiently than before the
recession. We’ve heard this story frequently in anecdotal accounts of
our directors and business contacts across the Southeast.

As long as efficiency and productivity gains can be achieved in
this way, employers may remain hesitant to hire. So a key question with
immediate relevance for the recovery and employment is, how long can
firms ride this productivity growth before having to yield to new hiring
to support greater activity?

International comparison

Before venturing a view on that question, let me frame an
international context for better perspective on the ups and downs of
labor productivity in this country. Even though the timing and extent of
the economic downturn were similar in most advanced economies, resulting
labor productivity patterns have varied widely. For instance, in the
United States the level of GDP declined by 3.7 percent, while the
unemployment rate rose 4.5 percentage points during the recession. By
contrast, in Germany the cumulative GDP decline was about 6 percent,
while unemployment rose by only about 1 percentage point. Germany-and
several other advanced economies-experienced a serious recession but a
significantly smaller increase in unemployment in comparison with the
United States.

It’s striking that the United States, even in good times, tends to
see much greater flows into and out of unemployment rolls than other
countries. This is an aspect of the vigorous turnover of jobs in our
economy-the regular destruction and creation of jobs in a dynamic market
economy. Other countries tend to experience relatively less such
movement in labor markets over time. Their experience probably reflects
institutional factors such as social laws that make separating employees
more expensive and lower quotients of entrepreneurial activity.

It can be argued that the comparative absence of labor market
rigidity in the United States results in comparatively large movements
over time of workers between industries and sectors and across
geography. We in the United States simply have more flexible employment
arrangements across the economy, allowing employers to adjust rapidly
and aggressively to downturns and requiring workers to be agile in
response to changing conditions.

There is a point to be made for the benefit of ATC students here:
Beyond the specialized skills you are acquiring in the college’s
excellent programs, there will be a high return to work skills that make
you versatile and mobile-for example, computer and IT skills.

Outlook for labor productivity and employment

To return to the question I posed earlier, slightly rephrased: Will
high productivity growth continue and have the effect of impeding
employment growth?

I do not expect the recent outsized productivity growth to continue
indefinitely and become a new, permanently higher trend rate. Some
degree of “wait and see” behavior is at work and is no doubt reflected
in the productivity numbers. With growing economic momentum, deferral of
hiring will become riskier.

Some employment gains should result as labor productivity levels
out and falls back over time to something resembling the historic trend
rate. But the pace of hiring is likely to be gradual. Current data on
the use of part-time workers suggest that businesses have some scope to
increase hours without hiring new full-time employees. And there are
other, more structural obstacles to the rapid reemployment of the
jobless. Some jobs in the construction sector and certain manufacturing
industries are likely permanently lost, requiring some amount of
migration of workers to other sectors. And, for a time, skill and
geographic mismatches may frustrate employers willing to hire.

Also, the weight of uncertainty about the future business
environment makes a gradual pace of employment progress a reasonable
assumption. I hear often from members of the business community that
uncertainty regarding federal, state, and local fiscal fundamentals and
regulatory rules-of-the-game are feeding reticence to pull the trigger
on new ventures, new hires, and new investments. The recent European
sovereign debt and banking pressures have added to uncertainty in
financial markets.

Sizing all this up, I expect recovery in the medium term to be
neither jobless nor job rich.

Appropriate monetary policy

As the recovery proceeds-as I believe it will-a central concern of
monetary policy will be when and by how much the Federal Reserve raises
the base level of interest rates.

The Fed has held its interest rate policy at close to zero for
about a year and a half. This has been done to foster conditions that
would end the contraction of the economy and then encourage recovery.
Again, I believe a modest recovery has been under way for almost 12
months.

As I stated earlier, the Fed has a dual mandate from Congress to
keep inflation low and promote maximum employment.

I’ve put forward the view that inflation is not currently a major
concern. So one might ask, do you believe the base interest rate must
remain near zero-at its current level-until unemployment is reduced
substantially and most of the employment lost in the recession has been
restored?

I’m not convinced that will be necessary. I continue to support the
current stance of interest rate policy. But the time is approaching when
it will be appropriate to consider recalibrating interest rate policy. I
do not believe that time has yet arrived. The conditions that require a
change of policy are not yet at hand. However, as the economy continues
to improve and financial markets find firmer ground, extraordinarily low
policy rates will not be needed to promote recovery and will become
inconsistent with maintaining price stability.

The implication is that the policy rate may have to begin to rise
even while unemployment is considerably higher than before the
recession. I’m very concerned about unemployment, and certainly
employment trends should be a critical consideration in setting policy.
But I accept that good policy, even in circumstances of unacceptable
levels of unemployment, may incorporate higher interest rates.

Again, I want to acknowledge the vital role that Atlanta Technical
College plays in our community in equipping young people, and some
slightly older people, to prosper even in difficult times. You do
important work.

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** Market News International Washington Bureau: 202-371-2121 **

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