Wednesday, February 25, 2015

Yellen’s problem with US felons

When we think of crowded US prisons, we do not usually turn to economists — still less central bankers. Yet America’s steep rate of incarceration must be high on the list of what keeps Janet Yellen up at night.

Markets will be waiting to pounce on the US Federal Reserve chair’s slightest nuance in her congressional testimony this week. Will the central bank lift rates in June or September? The key to her thinking lies in the US labour force participation rate. If it improves, the Fed can keep rates at zero without fear of wage inflation. If it stays put, Ms. Yellen may have to end the party far sooner.
 
Much has been made of the sharp fall in US unemployment in the past few months; it is now at just 5.7 per cent. But if the same number of Americans were active in the labour force today as at the start of the recession in 2007, the jobless rate would be almost 10 per cent. The labour force participation rate — the basis for calculating joblessness — has fallen to 62.8 per cent of adults today from a peak of 67.3 per in 2000.
 
Some of this fall is the result of changing demographics. The baby boomers are starting to retire. Some of it comes from the expansion of the US disability benefit, which pays millions more people to stay out of work than it used to.

What is often overlooked, however, is the starring role of the US criminal justice system.

More:  http://www.ft.com/cms/s/0/7a69c556-ba7d-11e4-945d-00144feab7de.html


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