×

I was right on jobs, not Yellen: Ex-Obama advisor

The economy is "very close" to full employment, and it's time for the Federal Reserve to raise interest rates for the first time in nine years, said Alan Krueger, former chairman of President Barack Obama's White House Council of Economic Advisers.

"I think it would be prudent for the Federal Reserve to start to normalize monetary policy," the Princeton professor of economics and public affairs told CNBC's "Squawk Box." The Fed meets Dec. 15-16, and is increasingly expected to hike rates, which have been at near-zero percent since December 2008 in the wake of the financial crisis.

In March 2014, Krueger dropped a bomb into the monetary policy debate with a paper that argued long-term unemployed Americans were likely to leave the workforce for good. Worse, those who have left were unlikely to come back. His theory: The supply of available workers may be smaller than it appears, and wage pressures are likely to develop more quickly. For policymakers, it meant that the Fed had less time to stay at zero than many of them had believed.

In a speech Wednesday, Fed Chair Janet Yellen disagreed with Krueger's findings. Yellen said: "I believe that a significant number of individuals now classified as out-of-the-labor-force would find and accept jobs in a stronger labor market."

Read MoreFed's Yellen on Capitol Hill: Job market is improving

Krueger told CNBC on Thursday that data from the Bureau of Labor Statistics don't bear out Yellen's optimism, which has been an argument for keeping rates low in order to boost the job market — half of the central bank's dual-mandate of fostering maximum employment and setting a target for inflation.

The longer a worker remains unemployed, the probability rises that he or she will leave the labor force altogether, Krueger asserted. He provided this chart to illustrate his point:

"This is what I anticipated," Krueger said. "That is the normal cyclical pattern. We saw that during the last recovery as well. As the recovery went on, the long-term unemployed became discouraged and increasingly left the labor force. The main difference now is we just had a much higher share of long-term unemployed."

In October, the number of long-term unemployed — those jobless for 27 weeks or more — was 2.1 million, representing 26.8 percent of all those who are jobless. The long-term unemployed spiked in the wake of the 2008 financial crisis. As the job market has improved in recent years, that number has been coming down. Meanwhile, the October labor participation rate was 62.4 percent. This measure of workers who are either employed or actively looking for work has been steadily declining since the financial crisis.

Read MoreFed rate hike won't end housing recovery: Fidelity

"We still have a large number of long-term unemployed and increasingly they're leaving the labor force still," Krueger said. "If you look at the chance of people rejoining the labor force after they've left. It doesn't tend to rise very much as the economy recovers."

Providing a second chart (see below), he said it shows: "The odds if you're long-term unemployed of finding employment unfortunately is still quite low."

"And then, once they've left the labor force — they've given up search for a job — there's a very low chance that they come back," he said, pointing to the lines representing those unemployed for 27-52 weeks and 53 weeks and over.

For those actively looking for a job, Krueger said there's some good news: "We are seeing real wages grow, which I could expect given the degree of tightness in the labor market."

Morning Squawk: CNBC's before the bell news roundup

Sign up to get Morning Squawk each weekday

Get this delivered to your inbox, and more info about about our products and service. Privacy Policy.
Please enter a valid email address

— CNBC's Senior Economics Reporter Steve Liesman and producer Elizabeth Schulze contributed to this report.