Atlanta Fed 2013 Annual Report: Uncertainty
Has Uncertainty Restricted Hiring?

Heightened uncertainty is one of several forces that weighed on the economy and hiring in 2013. Much of the uncertainty emanated from the government sector, especially regarding fiscal policy. Other factors clouded the outlook, too, including uncertainty about health care costs and the Affordable Care Act, and the economic outlook.

Although fiscal and monetary policy uncertainty seemed to ebb somewhat earlier in the year, it returned full force in the fall as the two-week federal government shutdown and the debt ceiling standoff dealt a blow to consumer and business confidence. Congress resolved the budget issue by the end of the year.

The question of how uncertainty affects the economy has been particularly relevant in the current recovery, although it has interested economists for some time. (Fed Chairman Ben Bernanke studied the topic earlier in his career.) According to a measure of economic policy uncertainty developed by economists Scott Baker, Nick Bloom, and Steven Davis, the past several years have been marked by historically high levels of policy-related uncertainty.

The crux of the problem is that firms—unsure of what lies ahead for taxes, regulations, and the economy—may delay investing and hiring. Anecdotal evidence gathered as part of the monetary policy process supports this theory. As the Federal Open Market Committee prepared to meet in October, the Beige Book noted that “employers continued to report hiring hesitancy related to changes in healthcare regulation and fiscal policy uncertainty.”

The Atlanta Fed’s Small Business Survey also honed in on the issue. Nearly half of respondents to the third-quarter 2013 survey reported a higher level of uncertainty relative to the first quarter. Moreover, many firms indicated that uncertainty was having a greater than usual impact on their decisions. Among them, about 20 percent expected their workforce to decrease and roughly half expected no change to their headcount.

The evidence linking heightened uncertainty and sluggish economic growth is not just the anecdotal sort. An emerging body of research supports these linkages, too. Last year, a much-cited report by research firm Macroeconomic Advisers attempted to quantify the economic effect of fiscal policy uncertainty, estimating that since 2009 it has shaved 0.3 percentage point per year from U.S. GDP. In 2013 alone, fiscal policy uncertainty kept the unemployment rate higher by 0.6 percentage point—the equivalent of 900,000 jobs, the report said.