“IT IS fair to say the economy is near maximum employment,” said Janet Yellen, chairman of the Federal Reserve, in recent comments preparing markets for rate rises to come. But “maximum employment”, like pornography, is in the eye of the beholder. American adults, of whom only about 69% have a job, seem less than maximally employed. In previous eras, governments of countries scarred by economic hardship set themselves the goal of “full” employment. Today, the target is termed “maximum”. But it is the same concept. It needs a bit of updating.
Ms Yellen has a particular definition of maximum employment in mind, built on the economic experience of the past half-century. In the 1960s and 1970s a consensus (or, at least, what passes for one in macroeconomics) emerged that government efforts to boost demand could push unemployment only so low. Below that “natural rate”, it would soon start climbing again and inflation would accelerate. So now central bankers take a guess at the natural rate and at how quickly unemployment that is “too low” will spark inflation. Maximum employment, in their view, is the sweet spot: the...Continue reading
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