NEW YORK/WASHINGTON (Reuters) - Gary Feeman has been searching for a job for 16 months. He's not ready to give up just yet, but the 60-year-old worries he is running out of options.
Feeman is among the more than 5 million Americans who have been out of work for more than six months and who represent the heart of the crisis in the labor market.
Their plight also poses a warning that U.S. unemployment may not drop back to its pre-recession levels and could be stuck higher than many policymakers expect.
Feeman, from Lancaster County, Pennsylvania, has sent out as many as 100 resumes. But the former maintenance director at a small amusement park in the area, has had only one interview in person. That was in January.
"I have tried everything under the sun," he said. "The frustrating thing to me is that when you apply for a job, employers do not respond either way."
One of the biggest challenges facing U.S. Federal Reserve Chairman Ben Bernanke and his colleagues is to understand whether people like Feeman will eventually find work once the economy gathers enough speed.
Bernanke appears to think they will and he has suggested more stimulus by the Fed might be needed to kick-start demand, and job creation, into a higher gear.
But if he's wrong, the central bank risks pumping too much money into the economy in an effort to help people who have become unemployable. Rather than bringing down the jobless rate, the Fed could eventually fuel higher inflation.
"We're living through a juncture in U.S. policy history in which we're making major decisions about what type of society we're likely to be," said Steven Davis, an economist at the University of Chicago. "Those decisions will affect things for a generation."
Some 40 percent of the nation's unemployed have been out of work for more than six months. That's over twice the rate of long-term unemployment just before the 2007-2009 recession.
Bernanke mostly pins long-term joblessness on weak demand from American consumers and companies. In late March, he pointed to data showing that, compared to before the recession, the short-term unemployed also are taking much longer to find work.
This, he argued, justifies the Fed's policy of keeping interest rates low to help the economy. Persistent long-term unemployment is a risk because it might some day make people unemployable, he said.
"If progress in reducing unemployment is too slow, the long-term unemployed will see their skills and labor force attachment atrophy further, possibly converting a cyclical problem into a structural one," Bernanke told a conference of economists.
Long-term unemployment has other costs for the economy. A paper for the Brookings Institution, a Washington think-tank, finds that men who lose their job when the unemployment rate is above 8 percent forfeit twice as much in future earnings than if had they lost their job when the rate was below 6 percent.
Still, a number of private economists argue there are signs the structural unemployment problem is already larger than Bernanke would acknowledge.
Most Fed policymakers think the jobless rate could fall to somewhere between 5.2 and 6 percent before the economy heats up enough to fuel inflation. That's a higher "natural" unemployment rate than the roughly 5 percent rate estimated by most Fed policymakers three years ago.
Many private sector economists have shifted their estimate of the natural rate even higher. Credit Suisse pegs it at around 6.5 percent, and UBS at near 7 percent.
"If that is the case the Fed will run out of effectiveness much sooner than they realize," said Adolfo Laurenti, deputy chief economist at Mesirow Financial, in Chicago. He estimates the natural rate at between 6.5 and 7 percent.
Some economists see signs of an increase in the natural jobless rate in the widespread mismatch between job openings and the qualifications of those seeking work.
The Beveridge Curve is used by economists to measure the relationship between job openings and unemployment: r.reuters.com/cam53s
In U.S. manufacturing, for example, more than 600,000 jobs are unfilled because of a lack of skilled applicants, according to a study by Deloitte and the Manufacturing Institute.
Many of the companies that are hiring are turning increasingly to younger workers with more up-to-date skills training, rather than taking a chance on people who have been out of work for a long time.
In Kentucky, a construction firm responded to the recession like most of its rivals: from 2008 to 2010, Gray Construction cut 51 of its total of 245 employees. As signs of growth returned to the economy, it started hiring again, with a focus on college graduates with specialized degrees.
"There has to be a very compelling reason to take somebody who was not in the industry, who has changed over to the industry, versus somebody who graduated with an engineering degree or construction management degree," said president and chief executive Stephen Gray.
Another possible source of a run-up in the natural jobless rate is that firms are relying more and more on automation technology. Workers untrained in using that technology could struggle to get jobs.
Some economists think long-term unemployment is also kept high because many workers can't move to find work because they owe more on their mortgages than their homes are worth.
"I don't think people have fully appreciated how deep the hole is," said Michael Greenstone, an economist at MIT university and former chief economist at the White House's Council of Economic Advisers. "The Great Recession is going to be living in our collective homes for many more years to come."
The Fed has bought $2.3 trillion in securities and kept interest rates near zero for over three years to aid the economy and fight the sharpest jump in unemployment since World War Two.
So far it has helped to bring the jobless rate down from 10 percent in 2009 to 8.2 percent in March, although many of the unemployed have become so demoralized that they have left the formal labor force.
If some economists are right to believe the natural unemployment rate is as high as 7 percent, then the Fed could hit a wall before long and need to tighten monetary policy.
Minneapolis Fed President Narayana Kocherlakota - one of the policymakers at the Fed who suggests rates will have to rise sooner than later - thinks last year's rise in inflation was a sign the Fed is approaching that wall.
"There's a point at which it gets to be very costly in terms of how much inflation you'd have to generate in order to get a reduction in unemployment," Kocherlakota said last month.
Such predictions are grim for construction workers like Mfthel, 36, who most days sits on a plastic crate at an intersection in Brooklyn, New York, waiting for casual work - as he has done most days since the recession hammered his industry.
Mfthel, who declined to give his family name, and some of the other dozen men waiting on the street corner with tools and steel-toe boots said they had permanent jobs before the construction boom ended. Now they can expect $7 to $10 an hour for repairing buildings, moving furniture and paving driveways.
"Now they don't come or they don't pay enough," he said. "You can't do much with 20 bucks."
Additional reporting by Ann Saphir; Editing by Frances Kerry