Assessing Maximum Employment 
Accurate assessment of labor market conditions is essential for informing monetary policy as the Federal Reserve pursues its dual mandate of maximum employment and stable prices. It is also a difficult task. Although a wider range of indicators can be used, this paper highlights a core set that is particularly informative for discussions about maximum employment and labor market slack.
Key Findings
- The unemployment rate is the key indicator of the cyclical position of the labor market. It is highly correlated with other indicators, and it has several practical advantages.
- Job vacancies and an analysis of the Beveridge curve help to distinguish movements in unemployment that are driven by aggregate demand versus movements that result from structural, supply-side forces. Additionally, job vacancies are more responsive than the unemployment rate to changes in slack when the labor market is very tight.
- The employment-to-population ratio (EPOP) and the labor force participation rate (LFPR) are especially useful during mature business cycles, when reductions in labor market slack tend to come less from reductions in the unemployment rate and more from cyclical improvements in the LFPR, particularly for some socioeconomic groups. Sharp movements in the LFPR also help identify shocks to labor supply
- A review of the labor market around two episodes—the Great Financial Crisis (GFC) of the late 2000s and the COVID-19 pandemic—shows how this core set of indicators characterized the progress of the labor market toward the Fed’s maximum-employment goal. The unemployment rate captured most of the cyclical movements in the labor market in both episodes. The LFPR also played an important role in both eras, but for different reasons. During and after the GFC, the LFPR responded slowly to changes in labor demand, in line with its normal cyclical behavior. During the pandemic, however, abrupt behavioral changes in labor supply, manifested in the LFPR, indicated that the level of maximum sustainable employment was lower than before the pandemic. During both the GFC and the pandemic, the ratio of vacancies to unemployment and the Beveridge curve helped assess the relative importance of supply- and demand-side shocks to the labor market.
Implications
Because of their conceptual relationship to maximum employment and their widespread availability and recognition, the indicators that the authors highlight can help guide discussions about maximum employment and labor market slack.
Abstract
We suggest a core set of indicators for evaluating the position of the labor market relative to maximum employment. The unemployment rate remains the key indicator of the cyclical position of the labor market, as it is time-tested, is highly correlated with other indicators, and has practical measurement advantages. But other indicators can provide complementary evidence to get a fuller picture of the labor market. A joint analysis of job vacancies and unemployment in a Beveridge curve diagram is helpful when structural shocks affect the labor market and when the labor market is very tight, while the employment-to-population ratio is useful late in expansions, when increases in employment tend to arise from higher labor force participation. Additional indicators—including wage growth and worker flows—can complement the core indicators we discuss. We draw on lessons from the Global Financial Crisis and the COVID-19 pandemic to evaluate the effectiveness of various indicators.