Here are two things most economists can agree upon: They want an economy where everyone who seeks a job can get one. Yet for the economy to be dynamic, some people will always be unemployed, at least temporarily as they move between jobs.
There exists, in theory at least, some magic number for the unemployment rate that keeps those priorities in perfect balance. Economists, as they are prone to do, have created an acronym for it: NAIRU, or the nonaccelerating inflation rate of unemployment.
The problem is, it is looking more and more as if we have no idea what this magic number is — an uncertainty that has huge economic consequences.
The new Federal Reserve chairman, Jerome Powell, showed the level of uncertainty facing top policymakers in congressional testimony last week when he said that he believes the economy is at full employment when the jobless rate is in the “low fours” — that is, at current levels, “but what that really means is it could be five and it could be 3.5.”
Just five years ago, the Congressional Budget Office estimated that NAIRU was 5.5 percent, and Fed leaders’ forecasts were in the same ballpark.
Lately, some of the very scholars and policymakers who once put NAIRU at the center of their economic analysis have lost faith that they have a good handle on it at all. “For it to be useful you have to have at least a little confidence you know the number,” said Alan Blinder, a Princeton economist and the Fed’s former vice chairman.
So for some officials charged with making policy in 2018, it seems the sensible strategy is to see just how low joblessness can go without causing problems.
“We have to have humility” about where the natural rate of unemployment really is, said Neel Kashkari, the president of the Federal Reserve Bank of Minneapolis.
The fact that the United States keeps adding jobs at a healthy clip, and that wages are rising only gradually, is itself evidence that unemployment can be allowed to drift lower than historical data might suggest. One reason, Kashkari theorizes, may be greater credibility that the Fed and other central banks won’t allow inflation to take off as it did back in the 1970s.
As Powell begins his term as Fed chairman, the question is how much he is willing to test the lower limits of unemployment. Nobody said guiding a $19 trillion economy is easy. Yet the fate of millions depends on Powell and his Fed colleagues to get the right answer.