Tuesday, June 15, 2021

The Fed has never put a number on its full employment target

See Retiring Workers Alter Fed’s Calculus on Jobs Shortfall: Shrinking labor force lowers the bar for when monetary stimulus can be dialed back by Paul Kiernan of The WSJ.

This relates to yesterday's post that discussed the fact that the quit rate is very high right now. Workers are getting raises and they feel confident in quitting to find something better. I think this is what we would expect if we are at full-employment (when we have the lowest rate of unemployment compatible with price stability, perhaps a 2% inflation rate).

But inflation is over that right now (although it might not last). So maybe we have even pushed past full-employment (which is not sustainable). We still are not back to the number of jobs we had before the pandemic, but we may have worker shortages because many people dropped out of the labor force (maybe due to retirements or getting high unemployment benefits while not being required to look for a job).

Excerpts from Kiernan's article:

"The Fed has never put a number on its full employment target. Still, central bankers for months have compared current employment to the number of jobs in February 2020, before the pandemic hit the U.S. economy, to illustrate the ground that needed to be made up. Chairman Jerome Powell said earlier this year that gap was “one way of counting it.” In May, the shortfall stood at 7.6 million jobs. 

But in recent weeks, policy makers have become less confident the economy can recover all the jobs lost amid the pandemic without spurring inflation. Employers added fewer payrolls than expected in April and May, even as the economy grew rapidly, wages rose and other indicators pointed to a shortage of workers. The unemployment rate also continued to fall, to a pandemic low of 5.8%. In part that is because fewer people are returning to the labor force in search of work. The number of people who are working or want to work is still 3.5 million shy of February 2020, and the labor-force participation rate, at 61.6%, is down from 63.3% then."

"“The number of people who left the labor force through retirement was higher during this pandemic recession-recovery than in previous recession-recoveries,” Cleveland Fed President Loretta Mester said June 4 on CNBC."

"“Whatever…the maximum rate of unemployment is, it’s something that varies over time for structural reasons,” Fed Vice Chairman Richard Clarida said last month. “Labor-force participation evolves for a number of reasons, and so I do think that, going forward, speaking for myself, we have to be very attuned and attentive to see how the post-pandemic labor market clears.”"

"If officials become convinced that the economy is destined to operate with lower rates of labor-force participation than before, they could start to tighten policy sooner than expected."

"Central bankers hope that by the fall—when enhanced unemployment programs expire, schools reopen and more people  are vaccinated—hiring will pick up steam and some recent retirees may return to the labor force."

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