There are nearly 10 million job openings in the U.S.
Right now.
Almost everybody who wants a job can have one.
I said that almost everybody can have a job.
And that's by design of the Federal Reserve.
The Fed has to monitor the labor market.
Fed has a dual mandate.
Dual mandate. And it focuses both on price stability and
also maximum sustainable employment.
Maximum sustainable employment is the highest
level of employment we can have without generating
harmful inflation.
The problem is that maximum employment target is much
less obvious than the 2% inflation rate target.
After all, the Fed itself says the max level of
employment is not directly measurable.
It's more sort of amorphous thing.
There isn't a number and there isn't one particular
measure either.
So then what does this mean?
Labor market conditions are consistent with maximum
employment.
Here's why every American who wants a job can't have a
job and what maximum employment really means.
So the Fed aims for 2% inflation year over year
straight forward.
But for the other half of the dual mandate, there's no
magic numerical target.
And the unemployment market just doesn't work like that.
The Federal Reserve cannot directly control the
unemployment rate.
Really what they're trying to eliminate is the part of
the unemployment that goes up and down because of the
cyclical nature of the economy.
We're never going to have 0% unemployment.
And that would make sense, right? Because there's
always going to be movement in the job market.
When Federal Reserve Chairman Jerome Powell said
most of the members of the Federal Open Market
Committee saw the labor market as consistent with
maximum employment in 2022.
He defined it as.
The highest level of employment that is
consistent with price stability. And that is that
is my personal view.
But the problem is.
Whether we can raise rates and move to less
accommodative and even tight financial conditions
without hurting the labor market.
So what Powell is saying here is stable employment
hinges on the Fed's actions on inflation, whether they
raise or lower interest rates.
Think of it like this.
The Fed mans a sailboat.
On deck, maximum employment rides along.
Powell can raise or lower its price stability sails by
pulling the interest rate cables that will help him
steer the boat.
So by controlling the sails of inflation, the Fed hopes
to set the labor market in the right direction.
The seas are pretty stormy, and the Fed has to steer
around some pretty big boulders in the harbor.
And so it makes it really hard because the wind might
shift and they may not realize the wind is shifting
until it's too late.
I tortured that metaphor to death.
In 2020, the Fed actually expanded its definition of
maximum employment.
And it said it would no longer preemptively raise
interest rates just because the unemployment rate had
fallen low. It would wait until it saw an uptick in
inflation.
That's when the Federal Reserve added broad-based
and inclusive to its employment goals.
That's sort of where you start thinking about how do
different populations fare.
Like we know for a fact that generally in any sort
of recession, it's going to be the low income workers
who are hit the hardest, right?
The Fed closely monitors this give and take
relationship between unemployment and inflation,
also known as.
The natural rate of unemployment. This shows the
sustainable level of employment that doesn't
cause inflation.
Unemployment that is consistent with expected
inflation equaling actual inflation.
Part of managing this balance calls for the Fed to
make tough choices for the labor market that could make
workers lose their jobs.
I think it's hard to sell to the public that what you're
trying to do is make more people unemployed, right?
No one wants to hear that.
The economics is if you have so many people working and
employers scrambling for workers, we will get more
inflation than we want.
The Fed tries to keep perfect balance of jobs to
inflation as steady as possible.
The law doesn't have the word sustainable in it.
The law just says maximum employment.
We can't run experiments on the unemployment rate or
inflation the way we can our hypotheses when it comes
to physics and chemistry.
The question is how low can the unemployment rate go
before it starts producing wage pressures and
inflation? The short answer is we don't really know.
Measuring employment starts with the headline
unemployment rate tracking how many people without jobs
have actively looked for employment in the last four
weeks.
Usually looking at the unemployment rate is enough
because most of the other measures of the labor market
travel pretty close to it.
Unemployment is only measuring that for people
who are looking for jobs, right?
Lots of groups of people who are not counted as
unemployed but might actually want a job.
And that's not going to show up in that unemployment
number.
So, economists dig deeper.
Well, one thing they're looking at is how many
people are there who say they'd like a job, but
they're not bothering to look because they don't
think they could find one.
That's called discouraged workers.
They're looking at what is the labor force
participation rate.
That is what fraction of the working age population
is either working or looking for work.
For example, the labor force participation rate declines
when people stop looking for work, which happened
amid the pandemic.
But these numbers aren't inclusive of nuance.
As one number does, it's masking all the
heterogeneity you can see, right?
So different races, different genders, different
age, groups are going to have very different levels
of participation.
Right now, there are about two job vacancies for every
one unemployed person.
That's where the job Openings and Labor Turnover
Survey, aka the JOLTS report comes in.
It's a look into who's been hired and who's been fired.
Things like the number of quits that we're seeing,
right? Or the number of job openings that are available.
Plus, demographics shift the understanding of this data.
That's a big reason why defining maximum employment
is extra tricky.
So, economists track workers ages.
I think it's really important to zoom in on the
prime age employment to population ratio.
That is the share of people between the ages of 25 and
54 who are working and try to figure out what sort of
structural unemployment for the U.S.
is today, given the technology, given the policy
landscape and given the demographic makeup of the
country. And so it does change over time.
So, at any given point in time, maximum employment is
defined by what the population looks like.
There might be times where 4% unemployment is
consistent with very low or falling inflation and other
times where it may be inflationary.
So, you've just got to kind of, you know, taste the
pudding, and see, and see how it goes.
The maximum employment goals shifts with the state of the
economy, just as Powell said back in 2022.
Maximum employment will evolve over time and through
the course of the business cycle and in the particular
situation we're in now, the level of maximum of
employment that's consistent with stable
prices may increase and we hope that it will as more
people come back into the labor market.
The interesting thing is that we were at maximum
employment before the pandemic and we had very
little inflation.
Our country is taking everything that COVID has to
throw at us and we've come back stronger.
America is back to work.
We're coming out of the pandemic, right?
And all of a sudden we got back to a point where
unemployment was historically low, which is
generally not what you would expect would happen.
And I think a lot of that is just outside of the Fed's
control.
Of what the Fed can control, the central bank is aiming
for what it calls a soft landing.
Powell thinks that employers will reduce the number of
vacancies in the economy.
That is, they'll stop hiring without laying a lot
of people off. And that's the path or the course to
bringing the sailboat to shore without hitting any
rocks. Jay Powell thinks the wind might hit the sails
just right.
The good news is that we do see labor force
participation picking up again.
And if companies find it easier to fill vacancies
without bidding up wages so much and then passing on
that cost to consumers with higher prices, perhaps, just
perhaps, we may be able to sustain this low level of
unemployment without inflation growing.
The Fed is a bunch of people who are sitting around
looking at all these numbers, trying to draw
something from recent history, but also trying to
understand how the world might be different today and
trying to make a judgment about how can they use the
levers they have to steer us towards the maximum part
of employment with the sustainable part, which they
think means it can only be sustainable if we're at or
near, somewhere near, 2% inflation.
The harder question for the Fed is how do you know when
there's too many people working in the economy and
therefore we have to raise interest rates so that some
of them get laid off so we can avoid inflation?