Bloomberg (08/20/12) Alex Kowalski

Most of the damage inflicted on the U.S. labor market by the recession is reversible, according to research from the Federal Reserve Bank of New York, leaving open the possibility that additional stimulus will be effective in reducing joblessness. Approximately one-third, or 1.5 percentage points, of the jump in unemployment from 5% as the economic slump began to its 10% peak in October 2009 can be traced to a mismatch between the supply of labor and job openings, according to the study, leaving the remainder due mainly to a lack of demand.

“There is still considerable weakness in the labor market,” says Aysegul Sahin, one of the authors and a New York Fed economist. “We see that the weakness in the labor market is not specific to certain groups, such as certain occupations or certain locations. This points to a case where labor market weakness can be attributable to the overall weakness in the economy.” A permanent shift would mean policy makers applying additional stimulus risk spurring inflation by driving unemployment down too far too quickly, while a temporary dislocation would indicate more can be done.