Don't get hysteresis

US jobs: While the March US unemployment report released by the Bureau of Labor Statistics saw 216,000 new jobs created, the average duration out of work crept back up, and remains far above previous cycles. US joblessness is stubbornly stickier this cycle; the risk is that as the skills of workers atrophy, wage inflation and shortages may kick in before full employment is reached.

The average duration of unemployment rose to 39 weeks in March, from 37.1 weeks in February and 31.7 weeks in March 2010. That's far above the unemployment duration seen in previous cycles, which even in the severe downturn of the early 1980s peaked at only 21.2 weeks in July 1983.

There are some difficulties with compatibility in the statistics; the BLS changed its methodology in January 2011. Moreover the duration of unemployment benefits - 99 weeks since 2009, but only 65 weeks in the last cycle and normally lower in earlier cycles - must have some effect, as those not collecting benefit may "drop out of the workforce" for BLS statistics. Nevertheless, the percentage of the unemployed who are long-term jobless - 46 percent in March - is also at record levels, further demonstrating the exceptional persistence of unemployment in this cycle.

That has implications for the long-term economic trajectory. As the economy approaches full employment and applicants for particular openings become scarce, wage pressures intensify and productivity growth declines as key jobs remain unfilled. However, workers who have been unemployed for a protracted period tend to lose skills and motivation, as well as lacking up-to-date work practices; hence they are no longer effective competition for many positions. Elevated levels of long-term unemployment thus increase the risk that labor scarcities and wage inflation may appear before the economy has returned to traditional levels of full employment.

In engineering terms, the "hysteresis" in the employment cycle - the resistance to a smooth return to full employment - has increased. That suggests the tendency for inflation to accelerate, on the wage side as well as through commodity prices, may prove hard to resist.