The law requires Federal Reserve officials to do what they can to foster maximum employment, yet it’s becoming obvious they really won’t know when or even if the economy ever gets there.
Last spring, the president of the Dallas Federal Reserve Bank, at the sort of local Chamber of Commerce event regional Fed presidents attend, made news by explaining that the economy hadn’t just arrived at maximum employment, it may have already shot past it.
He must have been wrong or we would not have just had heard about 312,000 new jobs in the last national employment report, maybe three or four times more as could be expected from growth in population. But there’s no reason to pick on this Fed bank president, as lots of other savvy people have made the same call.
A survey of economists a year ago found that they were roughly divided between those who thought full employment had been reached and others who said not yet, but gosh it was close.
We might not be very close even a year later.
The unemployment rate, released every month by the Bureau of Labor Statistics, just isn’t all that reliable anymore on the economics dashboard, so it’s hard to tell if the economy could still accelerate without the risk of overheating. As for how the formal unemployment rate looks lately, you would have to go back to 1969 to see it as low as it was last fall.
Last year was also the first time there were more job openings than unemployed workers, going back as far as those records were kept. That’s maximum employment, right? If there are more job openings than there are people to fill them, how much hotter can the job market even get?
Yet employers continue to hire and create new jobs. Wages only stubbornly inch up. And so many people came into the workforce that last month’s report with the big jobs number also noted that the unemployment rate actually ticked up, to 3.9 percent.
Federal Reserve officials are careful to use the term maximum employment when they talk, because that’s one of the things the Fed is required by law to care the most about, along with price stability. When that law was put on the books decades ago, it was understood that these two goals can’t easily be reached at the same time.
That’s because monetary policies that spur economic growth create more job opportunities. That can also create the conditions for broad-based price increases that may get out of hand. The reverse might be even worse, with the central bank trying to push down the rate of price inflation by tightening monetary policy and at the same time throwing lots of Americans out of work.
When it starts to look like maximum employment is getting close is when the Fed is supposed to gently hit the brakes by raising short-term interest rates.
“I find myself falling into the trap of, ‘We think we’re there, or we’re close to being there,’ ” Neel Kashkari, president of the Minneapolis Federal Reserve Bank, said in a recent conversation. “Then it turns out we’re not. So it’s a kind of natural, ‘We must be closer to being a maximum employment.’ Well, we don’t know. Maybe we’re still quite a ways away.”
It’s at least a little interesting that Kashkari admits to suspecting that maximum employment is finally upon us, because he’s been known as a Fed monetary policy resistor. He bucked the consensus to raise rates three times back in 2017, when he last took a turn among regional bank presidents as a voting member of the main monetary policy committee.
And even in a jobs report with a headline of 312,000 jobs, other numbers throughout the report suggest an economy at anything but maximum employment.
There were still 4.7 million people working part-time who would want more hours along with 1.3 million in the category of long-term unemployed. There also were 1.6 million people listed in what the Bureau of Labor Statistics calls marginally attached, an unemployed worker not quite in the workforce numbers because they haven’t recently looked for work, maybe because they got worn out trying.
And while the percentage of Americans with a job has ticked up over the past year, continuing a trend going back into 2011, it remains surprising how much lower this number is than during boom periods of the past.
It’s easy to get confused about this, thinking a smaller percentage of Americans working must mean the boomers are retiring. So a better measure to track is what’s called the prime-age employment to population ratio. That means counting people 25 years old and likely finished up with school up through age 54, when the retirement rate starts to pick up.
That prime-age employment ratio continues to inch up, last at just under 80 percent. That means one out of five Americans that age aren’t working. And that number has not gotten back to the rate it was at the start of the brutal Great Recession, and with a long way still to go to match the peak reached in the dot.com era.
“And economists don’t have a good explanation for why there’s this strong downward trend of prime-age workers,” Kashkari said. “So the question is, can it get back to 2000 levels? Does that define maximum employment? We just don’t know.”
Kashkari and other Fed officials keep talking about making policy choices based on the numbers they can see, and Kashkari is looking at wage growth as a more reliable way to tell if there’s much potential left in the labor market. Wage growth, in the most recent report, showed an increase of 3.2 percent over the last year, not adjusted for inflation.
Higher wages are not all he’s looking for, however, because productivity gains have to be considered, too. If workers produce a little more per shift and get paid a little more for it, that’s not inflation. What he’s looking for are wage gains that blow past productivity gains, as employers bid up the cost of scarce workers. That will mean the job market finally has gotten tight enough to be thinking about maximum employment.
Is that a 2019 development? The only safe answer seems to be “maybe.”