Former Romney Economic Advisors on the State of the Labor Market

While the Washington Republican leaders keep pushing austerity and complain about the Federal Reserve pursuing expansionary monetary policy, it is refreshing to see what Greg Mankiw is saying about the choices Janet Yellen will have to face:

In her recent testimony before the Senate Banking Committee, Janet L. Yellen, the eminently qualified nominee to lead the Fed, made clear she didn’t think the time for an exit had come. With inflation running below the Fed target of 2 percent and continued weakness in the labor market, she argued, the economy needs all the help the central bank can provide. Many of the numbers back up that diagnosis.

Mankiw note only cites the continuing high unemployment rate but also the low employment to population rate. Yet, Mankiw did note some contrary evidence:

Seven years ago, the vacancy rate was a bit over 3 percent. It fell to a low of 1.6 percent in July 2009, a month after the official trough of the recession. The most recent reading puts it at 2.8 percent. So according to this measure of labor-market tightness, the economy is almost back to normal. Data on wage inflation also suggest that the labor market has firmed up. Over the past year, average hourly earnings of production and nonsupervisory employees grew 2.2 percent, compared with 1.3 percent in the previous 12 months. Accelerating wage growth is not the sign of a deeply depressed labor market.

John Taylor, however, thinks the labor market is still incredibly weak:

Research by Christopher Erceg and Andrew Levin is providing solid evidence that the decline in the labor force participation rate since 2007 has been due to cyclical factors–the recession and slow recovery–rather than to demographic factors. In other words, the fact that such a large number of people have dropped out of the labor force is associated with the weak economy rather than to their reaching their retirement years–or some other typical demographic trend. Because the unemployment rate does not count the people who dropped out of the labor force it no longer gives a good reading of the state of the labor market. The unemployment rate would be much higher without this large decline in labor force participation.

Taylor shows the Erceg-Levin chart with unemployment adjusted for a “normal” labor force participation rate, which suggests an adjusted rate near 11%. He concludes:

There is no longer debate that the labor market performance in this recovery–and the recovery itself–is unusually weak. The debate is now over why. I have argued that it is the economic policy.

This is all fine but he didn’t say what economic policy should be doing. Does he still believe that Quantitative Easing should have been discontinued three years ago?