Taking the Bus to Full Employment

Thu, 28 May 2015

The April unemployment rate was 5.4 percent and, not surprisingly, I’ve been seeing newspaper articles discussing how close we are to full employment. This transported me back many years ago when I was a young economist serving on the staff of the President’s Council of Economic Advisers in Washington D.C. It was a most exciting experience. I had an office in the Old Executive Office Building right next to the White House. Great view.

One of my jobs was to go to the Labor Department the day before the monthly labor market data (unemployment, payroll employment, etc.) were released to the public the next morning at 8:30.  I would hail a cab both ways since I took the commuter bus to work. On the way back, my imagination would be working overtime as I clutched that manila envelope. I was one of a handful of people in the entire world who knew what these data showed before being made public. What if I left the envelope in the cab and the press got hold of it?  Suppose a bond trader found it and made a fortune because he had the information ahead of time. Anyway, that never happened. When I got back to my desk, I would write a brief evaluation of the data which I would give to my boss, the Chairman of the Council. He, in turn, would edit it a bit and send it over by messenger to the Oval Office next door. The Chairman, by the way, was a great economist named Herb Stein. His son, Ben Stein, played the famously boring economics teacher in the movie, Ferris Buehler’s Day Off.

Back then, the unemployment rate had been stuck above 5 percent for a while, but when it dropped to 5 percent, I wrote that “unemployment was in the neighborhood of full employment.” The President laughed when he read this and told my boss, “Neighborhood? You’d have to take a bus to get here to there …” At that time, there was a big debate over the precise level of full employment. Was it 5 percent? Or was it closer to 4 percent?

Back to the present: we’re starting to have that same debate again. The “consensus” of the Federal Reserve’s Open Market Committee, which sets interest rate policies, suggests that full employment is in the vicinity (neighborhood?) of 5.2 to 5.5 percent. A recent study by economists at Federal Reserve Bank of Chicago said it is closer to 5 percent and falling. This is a very serious matter that has a major bearing on when the Fed will start raising interest rates and by how much.

Full employment is a truly complicated concept. Greg Ip of the Wall Street Journal has compared it to the search for “Nessie”, the Loch Ness Monster! The most widely accepted definition is the jobless rate at which inflation is stable. Note: I did not say zero. Rather, at full employment the inflation rate will remain at whatever it is. That’s why economists refer to this as the NAIRU which stands for non accelerating inflation unemployment. If the Fed keeps interest rates too low for too long –- and unemployment is below NAIRU -- then inflation will accelerate.

The debate eventually will go something like this. As the actual unemployment rate gets closer to 5 percent, some experts will warn we’re getting awfully close to having more inflation. Others will say that we still have more room to maneuver so there’s no need to rush to raise interest rates.

As the French say, plus ça change, plus c'est la même chose. Roughly translated, this means “the more things change, the more they stay the same.”  Thank goodness for the internet because I don’t speak a word of French and I’ve always wanted to use that phrase but wasn’t sure of its exact meaning.  C’est la vie (that’s life).  Au revoir.

Nick Perna

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