It’s impossible to have an economy with 0% unemployment, but it’s also hard to keep unemployment low without starting painful inflation.
“It’s hard to tell Americans 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 maximum employment and maintaining price stability, known as the dual mandate.
However, the maximum amount of employment is difficult to determine.
“[Maximum employment is] “This kind of amorphous,” Rocha Vancodri, chief economist at labor market analytics firm Lightcast, told CNBC.
However, at the Federal Open Market Committee press conference in January 2024, Federal Reserve Chairman Jerome Powell declared that “labor 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 affect the unemployment rate.
It is also difficult to determine the maximum employment level because current measures of employment, such as the unemployment rate or the labor force participation rate, often do not take into account certain groups of people.
For example, the unemployment rate does not include discouraged workers, who want a job but have stopped looking for it because they feel they will not be able to find work.
“The good news is we’re already seeing workforce participation picking up again,” ZipRecruiter chief economist Julia Pollack told CNBC. “If companies find it easier to fill job vacancies without bidding big for wages and then pass that cost on to consumers at higher prices, then maybe, maybe, just maybe, we might be able to maintain this low level of unemployment without increasing inflation.”
Watch the video Above to learn more about what cap employment really means and how inflation affects employment.