Economy’s Fate Might Hinge on Question of ‘Full Employment’

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Some see low unemployment, high inflation as signs the job market is as healthy as it can get

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Is the U.S. There is an odd debate going on in the Federal Reserve over whether or not it is, mainly because it determines how quickly to raise interest rates. But its resolve will help shape the American economy—and improve Americans’ ability to find jobs, command higher wages, and improve living standards for years to come.

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The Fed, under Chairman Jerome Powell, has resisted precisely defining full employment, sometimes called maximum employment. But a guidepost comes from its projections of where the unemployment rate will be in the long run. In December, most officials thought it was around 4%.

By that measure, America already is. The Labor Department said last week that the unemployment rate fell to 3.9% in December, from 6.7% a year earlier.

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Meanwhile, employers added just 199,000 jobs last month, less than half of all average monthly gains for 2021. Hourly wages rose 4.7% in December, a far higher rate than 2.9% in 2019. Workers are leaving at the highest rate on record, often for higher wages.

On the surface, this suggests that there are not many workers left to be hired and that the recovery has done its job. With inflation hitting a 40-year high of 7% in December, conditions meet the textbook definition of full employment.

Indeed, economist Sung Won Sohn of Loyola Marymount University said that America is above full employment. He points to a higher inflation rate, which he said is being driven by rising wages. “And I don’t think we’ve seen the light at the end of the tunnel yet,” said Mr. Sohan.

The debate largely hinges on the size of the labor force, which was 1.4% smaller in December than before the pandemic, or 2.9 million people. Are those people gone for good, or will some people split up and apply for one of the many job opportunities?

As of August, about 2.4 million workers have retired early because of the pandemic, according to research by the Federal Reserve Bank of St. Louis. Most are unlikely to return.

Mr. Sohan thinks that some workers have chosen to stay at home and raise their children while their husbands work. “Their perspectives about employment are completely different,” said Mr. Sohan. “They’re really in no hurry to get back to work.”

If he is correct, the labor supply will remain tight, the unemployment rate will continue to fall, and rising wages will put pressure on inflation as companies compete for workers by raising wages.

In his Senate hearing for confirmation of a second term on Tuesday, Mr. Powell said the labor market was rapidly approaching or at maximum employment. Nonetheless, Fed officials have said that a fall in the unemployment rate may be followed by a rebound in the labor force, so it may take several more years to achieve the kind of employment gains that would normally occur at such a low unemployment rate. Will apply. Mr. Powell said high inflation could threaten such a rebound.

High inflation this time is not a symptom of a warming labor market, but a threat to it, Mr. Powell said. This is linked to the pandemic – such as product shortages due to supply-chain disruptions and stronger demand due to aggressive incentives to fuel demand – rather than rising wages, he argued.

He said the Fed’s plan to gradually raise interest rates this year is not in response to a labor market that has achieved full employment, but to try to help it get there. “Achieving maximum employment, by which we really mean that continued progress in hiring and participation, will require price stability,” Mr. Powell said.

Some private sector economists who agree with Mr Powell point out that the US still has about 3.6 million fewer jobs than before the pandemic. They say the unemployment rate is artificially low because of a paucity of job seekers, which they attribute to Covid-19, a lack of child care, and virus-related school closures putting many workers on edge. Are being given. These economists say that in the coming months, as vaccination or immunity eases the disease or fear of it and household savings are exhausted, workers will return to the labor force.

Still, there are big questions about the long-term supply of labour. Diane Swonk, chief economist at advisory firm Grant Thornton LLP, said immigration has fallen sharply and it is unclear whether it will recover, while some workers may be unable to return to work due to prolonged COVID-19 complications. Huh.

Whether the US is at full employment is “not an easy question to answer because the virus has so distorted the supply of jobs that the economy,” she said.

Nick Bunker, head of research at job site Indeed.com, points to another metric that suggests labor market reform is still on the runway. The key age employment-to-population ratio, the percentage of Americans aged 25 to 54 who are employed, was just 79% in December, down 1.5 percentage points in February 2020. Since anyone in this group who leaves employment is probably too young to retire, they are more likely to return.

If the Fed determines ahead of time that the economy is at full employment and moves too quickly to raise interest rates, “the bigger risk could potentially be millions of people who want a job and not be able to get it.” “Because higher interest rates will stifle recovery, Mr Bunker said.

Write Josh Mitchell at [email protected]

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