If individuals have remained unemployed for a prolonged period due to the absence of appropriate job skills so there is a mismatch between labor demand and supply – a structural imbalance in labor markets, then this is very different than if individuals lost their jobs during a deep recession that has been followed by a still tepid recovery – a cyclical problem in labor markets. In the first case, the long-term unemployed may be less well-attached to the labor market in terms of exerting downward pressure on compensation, while in the second case they were particularly unlucky – they are long-term unemployed because of bad timing. I suspect that a much greater proportion of those who are currently long-term unemployed have simply been very unlucky compared to historical averages. This blunts somewhat the distinction between being short- versus long-term unemployed. •  If the long-term unemployed are simply unlucky as opposed to not having the appropriate skills, then their impact on wages presumably depends on whether or not there is an excess supply of short-term unemployed. If there are plentiful shortterm unemployed, they may get the best job opportunities first. In part, this reflects employer bias against the long-term unemployed when they compete with those who have been unemployed for shorter periods. But, once the short-term unemployed pool is depleted, then the long-term unemployed will become more relevant to the labor market supply, so their impact on wages and the labor market will likely increase as the labor market tightens.
One obvious wildcard is the situation in Ukraine and relations with Russia. How this will evolve is difficult to predict. The big risk is that conditions deteriorate and the ultimate outcome is a disruption to energy supplies from Russia. When all these cross-currents are considered, the impetus to growth from abroad appears little changed from last year. Now a reasonable question would be: If the outlook is improving, then how does one explain the sharp slowdown in growth in the first quarter? My own view is that the principal factors behind the slowdown were transitory so we should not be overly concerned at this point. Some slowing in the first quarter was nearly inevitable. Foreign trade and inventories provided unsustainably large contributions to growth over the second half of last year and payback for those large gains was expected in the first quarter of this year. Also, the expiration of extended unemployment compensation benefits and bonus depreciation at the end of the year was likely to take some of the starch out of consumer spending and business fixed investment. Beyond these anticipated factors, we had unusually harsh winter weather, which likely depressed housing activity, manufacturing production and some aspects of household spending such as motor vehicle purchases. With the fundamentals of the economy improving and fiscal drag abating, I expect the economy to get back on to a roughly 3 percent growth trajectory over the remainder of this year, with some further strengthening likely in 2015.