It is impossible to have an economy with 0% unemployment, but it is also difficult to keep unemployment low without triggering painful inflation.
“It’s hard to tell Americans that we can have too many people working,” David Wessel, director of the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution, told CNBC.
Since 1977, the Federal Reserve has focused on creating as many jobs as possible and keeping prices stable, commonly referred to as the dual mandate.
However, maximum employment is difficult to quantify.
“[Maximum employment is] this more amorphous sort of thing,” Rucha Vankudre, senior economist at labor market analytics firm Lightcast, told CNBC. “There’s no number, and there’s no particular measure either. .”
However, at the Federal Open Market Committee’s press conference in January 2022, Federal Reserve Chairman Jerome Powell announced that “labour market conditions are consistent with maximum employment.”
The Fed cannot directly control the unemployment rate, but when the central bank adjusts interest rates in response to inflation, it can indirectly influence the unemployment rate.
Peak employment is also difficult to quantify because existing measures of employment, such as the unemployment rate or the participation rate, often do not take certain groups of people into account.
For example, the unemployment rate does not include discouraged workers, who want a job but have stopped looking for one because they feel they will not be able to find a job.
“The good news is that we are seeing a recovery in labor force participation,” ZipRecruiter chief economist Julia Pollak told CNBC. “If businesses find it easier to fill vacancies without raising wages too much, and then pass that cost on to consumers with higher prices, then maybe, just maybe, we can keep that low level of unemployment. without increasing inflation.”
Watch the video above for more on what peak employment actually means and how inflation affects employment.