Adam Ozimek: Wider Labor Market Slack Implies Lower Rates: "Wider slack measured using the prime non-employment rate—the share of people age 25 to 54 who don’t have a job—does a better job explaining wage growth over the last few decades than the unemployment rate, making it a plausibly better recent measure of labor slack.... Continued slack is consistent with strong monthly job growth alongside near-target inflation...

....What’s more, it is not clear that 2007 marks the best benchmark for full employment. The prime non-employment rate today remains significantly elevated compared with the early 2000s and is still improving quickly without generating above-target inflation. If we assume full employment is the rates from the end of the first quarter of 2001, the effects on the federal funds rate of wider slack are even more significant.... These results do not definitively establish where the federal funds rate should be set. Monetary policy is difficult and complex, and there are a variety of factors to consider beyond the labor market. But it is useful to understand that if wider labor market slack is best measured by the prime non-employment rate, and if full employment would mean getting back to 2001 levels, this suggests that a highly accommodative federal funds rate could still be optimal....


#shouldread
#monetarypolicy

Comments