Right now.

Almost everybody who wants a job can have one.

I said that almost everybody can have a job.

And that's by design of the Federal Reserve.

The Fed has to monitor the labor market.

Fed has a dual mandate.

Dual mandate. And it focuses both on price stability and

also maximum sustainable employment.

Maximum sustainable employment is the highest

level of employment we can have without generating

harmful inflation.

The problem is that maximum employment target is much

less obvious than the 2% inflation rate target.

After all, the Fed itself says the max level of

employment is not directly measurable.

It's more sort of amorphous thing.

There isn't a number and there isn't one particular

measure either.

So then what does this mean?

Labor market conditions are consistent with maximum

employment.

Here's why every American who wants a job can't have a

job and what maximum employment really means.

So the Fed aims for 2% inflation year over year

straight forward.

But for the other half of the dual mandate, there's no

magic numerical target.

And the unemployment market just doesn't work like that.

The Federal Reserve cannot directly control the

unemployment rate.

Really what they're trying to eliminate is the part of

the unemployment that goes up and down because of the

cyclical nature of the economy.

We're never going to have 0% unemployment.

And that would make sense, right? Because there's

always going to be movement in the job market.

When Federal Reserve Chairman Jerome Powell said

most of the members of the Federal Open Market

Committee saw the labor market as consistent with

maximum employment in 2022.

He defined it as.

The highest level of employment that is

consistent with price stability. And that is that

is my personal view.

But the problem is.

Whether we can raise rates and move to less

accommodative and even tight financial conditions

without hurting the labor market.

So what Powell is saying here is stable employment

hinges on the Fed's actions on inflation, whether they

raise or lower interest rates.

Think of it like this.

The Fed mans a sailboat.

On deck, maximum employment rides along.

Powell can raise or lower its price stability sails by

pulling the interest rate cables that will help him

steer the boat.

So by controlling the sails of inflation, the Fed hopes

to set the labor market in the right direction.

The seas are pretty stormy, and the Fed has to steer

around some pretty big boulders in the harbor.

And so it makes it really hard because the wind might

shift and they may not realize the wind is shifting

until it's too late.

I tortured that metaphor to death.

In 2020, the Fed actually expanded its definition of

maximum employment.

And it said it would no longer preemptively raise

interest rates just because the unemployment rate had

fallen low. It would wait until it saw an uptick in

inflation.

That's when the Federal Reserve added broad-based

and inclusive to its employment goals.

That's sort of where you start thinking about how do

different populations fare.

Like we know for a fact that generally in any sort

of recession, it's going to be the low income workers

who are hit the hardest, right?

The Fed closely monitors this give and take

relationship between unemployment and inflation,

also known as.

The natural rate of unemployment. This shows the

sustainable level of employment that doesn't

cause inflation.

Unemployment that is consistent with expected

inflation equaling actual inflation.

Part of managing this balance calls for the Fed to

make tough choices for the labor market that could make

workers lose their jobs.

I think it's hard to sell to the public that what you're

trying to do is make more people unemployed, right?

No one wants to hear that.

The economics is if you have so many people working and

employers scrambling for workers, we will get more

inflation than we want.

The Fed tries to keep perfect balance of jobs to

inflation as steady as possible.

The law doesn't have the word sustainable in it.

The law just says maximum employment.

We can't run experiments on the unemployment rate or

inflation the way we can our hypotheses when it comes

to physics and chemistry.

The question is how low can the unemployment rate go

before it starts producing wage pressures and

inflation? The short answer is we don't really know.

Measuring employment starts with the headline

unemployment rate tracking how many people without jobs

have actively looked for employment in the last four

weeks.

Usually looking at the unemployment rate is enough

because most of the other measures of the labor market

travel pretty close to it.

Unemployment is only measuring that for people

who are looking for jobs, right?

Lots of groups of people who are not counted as

unemployed but might actually want a job.

And that's not going to show up in that unemployment

number.

So, economists dig deeper.

Well, one thing they're looking at is how many

people are there who say they'd like a job, but

they're not bothering to look because they don't

think they could find one.

That's called discouraged workers.

They're looking at what is the labor force

participation rate.

That is what fraction of the working age population

is either working or looking for work.

For example, the labor force participation rate declines

when people stop looking for work, which happened

amid the pandemic.

But these numbers aren't inclusive of nuance.

As one number does, it's masking all the

heterogeneity you can see, right?

So different races, different genders, different

age, groups are going to have very different levels

of participation.

Right now, there are about two job vacancies for every

one unemployed person.

That's where the job Openings and Labor Turnover

Survey, aka the JOLTS report comes in.

It's a look into who's been hired and who's been fired.

Things like the number of quits that we're seeing,

right? Or the number of job openings that are available.

Plus, demographics shift the understanding of this data.

That's a big reason why defining maximum employment

is extra tricky.

So, economists track workers ages.

I think it's really important to zoom in on the

prime age employment to population ratio.

That is the share of people between the ages of 25 and

54 who are working and try to figure out what sort of

structural unemployment for the U.S.

is today, given the technology, given the policy

landscape and given the demographic makeup of the

country. And so it does change over time.

So, at any given point in time, maximum employment is

defined by what the population looks like.

There might be times where 4% unemployment is

consistent with very low or falling inflation and other

times where it may be inflationary.

So, you've just got to kind of, you know, taste the

pudding, and see, and see how it goes.

The maximum employment goals shifts with the state of the

economy, just as Powell said back in 2022.

Maximum employment will evolve over time and through

the course of the business cycle and in the particular

situation we're in now, the level of maximum of

employment that's consistent with stable

prices may increase and we hope that it will as more

people come back into the labor market.

The interesting thing is that we were at maximum

employment before the pandemic and we had very

little inflation.

Our country is taking everything that COVID has to

throw at us and we've come back stronger.

America is back to work.

We're coming out of the pandemic, right?

And all of a sudden we got back to a point where

unemployment was historically low, which is

generally not what you would expect would happen.

And I think a lot of that is just outside of the Fed's

control.

Of what the Fed can control, the central bank is aiming

for what it calls a soft landing.

Powell thinks that employers will reduce the number of

vacancies in the economy.

That is, they'll stop hiring without laying a lot

of people off. And that's the path or the course to

bringing the sailboat to shore without hitting any

rocks. Jay Powell thinks the wind might hit the sails

just right.

The good news is that we do see labor force

participation picking up again.

And if companies find it easier to fill vacancies

without bidding up wages so much and then passing on

that cost to consumers with higher prices, perhaps, just

perhaps, we may be able to sustain this low level of

unemployment without inflation growing.

The Fed is a bunch of people who are sitting around

looking at all these numbers, trying to draw

something from recent history, but also trying to

understand how the world might be different today and

trying to make a judgment about how can they use the

levers they have to steer us towards the maximum part

of employment with the sustainable part, which they

think means it can only be sustainable if we're at or

near, somewhere near, 2% inflation.

The harder question for the Fed is how do you know when

there's too many people working in the economy and

therefore we have to raise interest rates so that some

of them get laid off so we can avoid inflation?