Academic Literature

Low Interest Rates Didn’t Induce Job Growth finds Research by St-Louis FED

The Federal Reserve set the target range for the federal funds rate at 0 to 25 basis points in December 2008. It has remained there because the recovery in output and jobs has been so slow. The rate was set so low to stimulate aggregate demand and job growth (by lowering borrowing costs for consumers and firms). With low interest rates, consumers are more likely to increase spending now rather than wait to consume later. Low interest rates also drop the cost of borrowing to invest in productive capital. The increased demand for consumption and investment then leads to higher demand for labor. But of late, the low interest rates do not seem to be having much of the intended effect, either on spending or on job growth.

The Federal Funds Rate and the Employment-to-Population Ratio

SOURCES: Federal Reserve Board, Bureau of Labor Statistics/Haver Analytics.

NOTE: The shaded areas indicate recessions.

One way to gauge job activity is to look at the ratio of employed people to the civilian population. The employment-to-population ratio falls whenever people quit their jobs and leave the labor force. It also falls when workers are laid off and counted among the unemployed. The figure shows this ratio from 1990 through 2012. The shaded areas represent recessions. As can be seen, the employment-to-population ratio dips to a trough early in each recovery, but the most recent recovery is distinguished by the failure of this ratio to rebound from the post-recession low.

The figure also shows the federal funds rate over the same period. A cursory glance reveals positive comovement between the employment-to-population ratio and the Federal Reserve’s policy rate.

Chosen excerpts by Job Market Monitor

via Low Interest Rates Have Yet To Spur Job Growth.

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