Labor Market Slack and Monetary Policy
In a speech to the Boston Economic Club, Federal Reserve Bank of Boston President Eric Rosengren called for a "patient approach" to removing the Fed's accommodative monetary policy, given the high numbers of U.S. workers who want full-time work but are currently working part time. He also cited the still-high unemployment rate, and the very low inflation rate.
These factors are all consistent with significant "slack" in labor markets. Rosengren argued that the traditional, widely reported measure of unemployment "probably understates the degree of slack remaining in labor markets and the economy more generally."
"While the unemployment rate has recently fallen to 6.6 percent, there remain 7.3 million Americans who want full-time work but are currently working part time," Rosengren said.
These 7.3 million Americans are working part time for so-called "economic reasons," and likely reflect a large supply of underutilized workers. "These are people who would be working full time if there were sufficient demand, but firms have reduced their hours because of business conditions," said Rosengren.
And while the number of individuals working part time for economic reasons is down from a peak of approximately 9 million Americans after the recession, it remains dramatically higher than was experienced from 1994 until the financial crisis.
In addition to the broader measures of unemployment and under-employment, Rosengren cited the absence of inflationary pressures. "The absence of pricing pressure" is consistent with the still-elevated number of unemployed workers and the very elevated numbers of under-employed workers.
While the unemployment rate has approached the 6.5 percent "threshold" noted in the policy statement of the Federal Open Market Committee (FOMC), Rosengren said there still remains significant slack in labor markets, actual inflation remains well below the Federal Reserve's 2 percent target, and inflation expectations remain stable.
Rosengren noted that 6.5 percent is "a threshold, not a trigger." As the unemployment rate falls and approaches that threshold, the Federal Reserve must make an assessment of the degree of remaining labor market slack as it sets monetary policy.
"It is vitally important that labor markets continue to improve," Rosengren said. In his view, "Monetary policy should continue to be accommodative, supporting a return to full employment, given the very low inflation rates."