Today's lackluster employment report shows that despite substantial job market improvements over the last year or so, the Federal Reserve should not yet start raising interest rates to prevent the economy from overheating and producing unacceptable inflation. There's still too much labor market "slack" (too many people who want to work, or who want to work more hours) for the Fed to shift its chief concern to the risk of too much inflation (see chart).
As experts increasingly recognize -- and as former Fed Chairman Ben Bernanke reiterated at this week's CBPP Full Employment Project event -- reductions in the unemployment rate do not fully reflect how close we're getting to full employment.
The unemployment rate does not, for example, account for hidden unemployment that arises when people who want to be working and likely would be working in a full-employment economy have stopped looking and thus dropped out of the labor force. Nor does it account for underemployment that arises when people want to work full-time job but can only find part-time work. The labor department's "U6" measure of unemployment and underemployment in the chart includes some of the hidden unemployed -- those who say they want work and are available for work but haven't looked recently enough to be counted as officially unemployed. But it doesn't include many more who might be lured back into the labor force by the higher wages and greater job opportunities that a full-employment economy likely would generate.
Some of the decline in labor force participation since the December 2007 start of the Great Recession and the resulting decline in the share of the population with a job reflects demography, as baby boomers age into their retirement years and swell the non-working population. But it's hard to know how much a "high-pressure" labor market like we last saw in the late 1990s -- when jobs were plentiful and employers were competing for workers rather than workers competing against one another for jobs -- would reverse the decline in the employment-to-population ratio.
The Fed has a dual mandate to pursue both maximum employment and stable prices, but, in today's environment, the large benefits from continuing to focus on achieving full employment outweigh any risks that uncontainable inflation will break out.
About the March Jobs Report
Employers reported only moderate payroll job growth in March. In the separate household survey, the unemployment rate remained at 5.5 percent, but labor force participation declined slightly.
- Private and government payrolls combined rose by 126,000 jobs in March, while job growth in the previous two months was revised down by 69,000. Private employers added 129,000 jobs in March, while overall government employment fell by 3,000. Federal government employment fell by 2,000, state government fell by 4,000, and local government rose by 3,000.