Fiscal And Monetary Policy Uncertainty Increased Unemployment By 1.3 Percent, From 6.5 To 7.8 Percent At End Of 2012: Fed Reserve Bank Of San Francisco

From Federal Reserve Bank of San Francisco Economic Letter, "Uncertainty and the Slow Labor Market Recovery" by Sylvain Leduc and Zheng Liu:

The U.S. labor market has recovered more slowly following the Great Recession than after previous recessions. Historically, the unemployment rate tends to fall as job openings increase, a relationship represented graphically by the Beveridge curve. However, even though the number of job openings in the economy has been rising during the recovery, the unemployment rate has remained stubbornly high. As a result, as Figure 1 shows, the Beveridge curve has shifted away from its historical pattern. There are now more jobless workers for a given number of job openings than in the decade before the downturn.

Sources: Job Openings and Labor Turnover Survey (JOLTS), Daly et al. (2012),and authors’ calculations. Federal Reserve Bank of San Francisco

***We present evidence that heightened uncertainty about economic policy during the recovery made businesses more reluctant to hire workers. When uncertainty rises, businesses become more hesitant to hire. They reduce recruiting efforts by raising hiring standards, increasing the number of interviews, or simply not filling vacancies. For instance, some businesses may interview candidates multiple times and end up deciding to postpone hiring altogether (see Rampell 2013).

Our results suggest that heightened policy uncertainty accounts for as much as two-thirds of the recent shift in the Beveridge curve. We estimate that uncertainty pushed the unemployment rate 1.3 percentage points higher by late 2012 than it would have been based on trends from the decade before the downturn. Without elevated uncertainty, unemployment would have been roughly 6.5% at the end of 2012, instead of the actual 7.8%.***In an uncertain economic environment, businesses reduce their recruiting intensity. This means that job seekers are less likely to be successful in finding work, even though posted job vacancies increase.