Notably, an examination of recent deviations from Okun's law suggests that the recent decline in the unemployment rate may reflect, at least in part, a reversal of the unusually large layoffs that occurred during late 2008 and over 2009. To the extent that this reversal has been completed, further significant improvements in the unemployment rate will likely require a more-rapid expansion of production and demand from consumers and businesses, a process that can be supported by continued accommodative policies.

Well, unemployment insurance is multi-faceted.

On the one hand obviously it provides some support for people who are unemployed or who have unemployed family members. And those people, in turn, also will be more likely to spend which will add to demand in the economy. It probably on the margin leads people to wait a little longer, the spells of unemployment may be a little bit longer because of unemployment insurance but that, too, is a mixed blessing because in some cases the extra time allows people to find a more appropriate job with a higher wage instead of taking the very first thing that they see.

From the Q&A Session

A lot of forecasters really have what I would call a hysteresis forecast for U.S. unemployment so what they're saying is that it won't go down. It might go up from where it is right now over the next two years. If that really happens - and I don't really see the basis of that - but if they think that that's really what's going to happen, then I think it would be very dangerous to tie monetary policy directly and numerically to the unemployment rate as has sometimes been suggested, so it's exactly in the situation where you're worried about hysteresis, which is sort of a European style of unemployment outcome.

Two tendencies in particular suggest that the U.S. labor market has lost some of the dynamism that had long contributed to its resilience. First, it is apparent that job reallocation--that is, the sum of the jobs created at some businesses and lost in others--has been in secular decline since the late 1990s. It may seem counterintuitive to include lost jobs in a measure of labor market health, and on its own it is obviously not such an indicator. But when combined with new jobs, it forms part of the dynamic of job reallocation, an important part of the "creative destruction" that contributes to long-run economic growth--for example, as jobs shift from less-productive firms to more-productive ones.

Second, the amount of employee movement across jobs has fallen over time. Specifically, the rate at which workers move from one firm to another has declined. So has the rate at which workers quit jobs, an indication of the degree to which they believe there are better jobs available for them. In what may be a related trend, geographic mobility across counties and states has decreased.

In sum, I do not think arguments suggesting that structural factors account for most of the increase in unemployment are persuasive, either individually or collectively. Our efforts to quantify the increase in structural unemployment since the onset of the recession find that it accounts for less than one-fourth of the difference between today's unemployment rate and that which prevailed in the pre-crisis years.

“This unemployment situation we have, the jobs situation, is really a national crisis,” Bernanke said in response to questions after a speech yesterday in Cleveland. “We’ve had close to 10 percent unemployment now for a number of years and, of the people who are unemployed, about 45 percent have been unemployed for six months or more. This is unheard of.”

I conclude that the current accommodative stance of monetary policy is appropriate. However, the Federal Open Market Committee will need to remain vigilant to the possibility of changes in the gap between the unemployment rate and [the natural jobless rate].

Well, I think there is a fair amount of empirical evidence that suggests that there is a stall speed for the economy. One interesting fact from the post war-- World War II period in the United States is we've never had a three-tenths of a percent rise in the unemployment rate without actually once it goes up three-tenths of a percent, we end up having a full blown recession.

And the next-- increase after three-tenths of a percent, the smallest is 1.9 percentage points. So that we've never had an increase in the unemployment rate of just a half a percent, or just one percent, or just one and a half percent.  So that does suggest that that-- that once you get to a certain point, and an unemployment rate goes up enough, that starts to weigh on confidence, that starts to weigh on spending. If spending is cut back, that leads to more unemployment, and the economy cycles down into recession.

Despite its length, though, I don't expect this recession to necessarily rival the deep recession in the early 1980s in terms of unemployment. In the early 1980s, the unemployment rate rose above 10.5 percent. I do not expect the unemployment rate to stray into double digits during this recession. Yet, I also don't expect it to begin coming down soon. Keep in mind that unemployment is a lagging indicator. It will not begin to come down until after the economy is well on its way to recovery.

Recent increases in U.S. wages and salaries have been quite modest and do not show evidence of “ratcheting up” related to recent supply shocks (see Figure 7).

To sum up the story on the outlook for real GDP growth, my own view is that, under appropriate monetary policy, the economy is still likely to achieve a relatively smooth adjustment path, with real GDP growth gradually returning to its roughly 2½ percent trend over the next year or so, and the unemployment rate rising only very gradually to just above its 4¾ percent sustainable level.    

I've heard more than a few stories of shortages of highly skilled workers, but thus far the increases in overall compensation have been relatively moderate. Furthermore, firms often tell me that productivity gains have given them a great deal of flexibility to produce without generating cost pressures.

I expect real GDP to grow by about 3 percent, which I estimate to be its underlying trend rate. That kind of growth should hold the unemployment rate to just below 5 percent. The outlook for inflation is more uncertain. Inflation stopped accelerating in the last few months, but whether it will continue to recede in the coming year is not yet clear. Additional monetary policy action may be needed to keep us moving along the path to price stability. 

I will spend some time focusing on an emerging puzzle in the data: why is the labor market apparently going gangbusters, while growth in real GDP has turned in only a middling performance on average in recent quarters?

I expect wages to rise, and I do think that higher real wages are completely compatible with low inflation.

With respect to wages, there are alternative measures of wages that give somewhat different answers, but I agree that, for example, that average hourly earnings for production workers as measured by the payroll survey has not shown real gains.  And one of the key problems there, it's important to note, is, in fact, the increase in energy prices. So what people get at the pay stub, they lose at the gas pump.