What Is Maximum Employment? Whatever It Is The Current Labor Market Is Well Beyond Maximum
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Having erred in calling the inflation surge transitory, the Fed appears to be making another error in assessing the labor market. The official statement following the December 14-15 FOMC meeting stated that "the Committee expects it will be appropriate to maintain this target range (i.e., on official rates) until labor market conditions have reached levels consistent with the Committee assessments of maximum employment.
What is maximum employment? Maximum employment is a level of employment and joblessness that strikes a healthy balance between demand and supply of labor, resulting in moderate wage increases. The current employment situation is anything but balanced.
November's unemployment rate of 4.2% is 1.8 percentage points below March. The last time the jobless rate starting at 6% fell as much as it did since March was 1950---over 70 years ago. Yet, after that record fall, there are 11 million job openings, 4 million more than the unemployed. Moreover, a record number of small businesses can't find qualified workers, and a record number are planning wage increases.
Average hourly earnings have increased 5.9% in the past year. Workers are demanding more, and companies are rushing to meet those demands by hiking wages and bonuses and promising more.
Labor markets have far passed the point of demand and supply balance. And by not recognizing the tightness of labor markets, the Fed is fueling a faster wage cycle and a different source of inflation.
Viewpoint commentaries are the opinions of the author and do not reflect the views of Haver Analytics.
Joseph G. Carson
AuthorMore in Author Profile »Joseph G. Carson, Former Director of Global Economic Research, Alliance Bernstein. Joseph G. Carson joined Alliance Bernstein in 2001. He oversaw the Economic Analysis team for Alliance Bernstein Fixed Income and has primary responsibility for the economic and interest-rate analysis of the US. Previously, Carson was chief economist of the Americas for UBS Warburg, where he was primarily responsible for forecasting the US economy and interest rates. From 1996 to 1999, he was chief US economist at Deutsche Bank. While there, Carson was named to the Institutional Investor All-Star Team for Fixed Income and ranked as one of Best Analysts and Economists by The Global Investor Fixed Income Survey. He began his professional career in 1977 as a staff economist for the chief economist’s office in the US Department of Commerce, where he was designated the department’s representative at the Council on Wage and Price Stability during President Carter’s voluntary wage and price guidelines program. In 1979, Carson joined General Motors as an analyst. He held a variety of roles at GM, including chief forecaster for North America and chief analyst in charge of production recommendations for the Truck Group. From 1981 to 1986, Carson served as vice president and senior economist for the Capital Markets Economics Group at Merrill Lynch. In 1986, he joined Chemical Bank; he later became its chief economist. From 1992 to 1996, Carson served as chief economist at Dean Witter, where he sat on the investment-policy and stock-selection committees. He received his BA and MA from Youngstown State University and did his PhD coursework at George Washington University. Honorary Doctorate Degree, Business Administration Youngstown State University 2016. Location: New York.
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