Observations on Labor Markets
Federal Reserve Bank of Boston President Eric Rosengren said Friday that the economy is on the mend and the unemployment rate has declined almost everywhere, but we still see a significant amount of labor market "slack" (excess capacity, given the level of demand for labor).
The widely-cited unemployment rate, and the broader measures that give a fuller picture of labor market conditions, all rose much more during the last recession than in the previous one-and still remain well above pre-recession levels.
"Critical to any decision on lifting short-term interest rates will be the matter of how much labor market slack exists currently, and how long before the economy reaches what we would consider to be full employment," said Rosengren.
Most forecasters expected a much more gradual improvement in the unemployment rate than has occurred-missing, in part, because the growth of the labor force has been so slow. It appears that some potential workers became discouraged with job prospects and withdrew from the labor force, while others never joined at all.
"However, as labor markets tighten, the job prospects for these discouraged workers should improve," said Rosengren. "It is likely that some of the new jobs opening up will be filled by individuals not currently counted in the labor force."
With more potential workers in the labor force, the unemployment rate may come down more slowly than its recent trend-even if the pace of job creation continues as in the first half of this year.
Rosengren noted the importance of the broader measures of labor market conditions-measuring things like discouraged and marginally attached workers, who have stopped looking, and those who are working only part time because full time work or schedules are not available.
"Inflation remains at only 1.6 percent, with no sign of significant wage pressures in labor markets. The lack of wage pressures suggests that we are not yet near full employment."
As a consequence of all this, Rosengren considers it appropriate for monetary policy to be "patient" in removing accommodation, in the interest of ensuring that the economy reaches full employment and the 2 percent inflation target as quickly as possible.
Rosengren does not expect that it will be appropriate to raise short-term rates "until the U.S. economy is within one year of both achieving full employment and returning to within a narrow band around 2 percent inflation."