The Washington PostDemocracy Dies in Darkness

‘Fed Up’ with the absence of full employment

Members of the Fed Up coalition in Jackson Hole, Wyo. (David Paul Morris/Bloomberg News)
Placeholder while article actions load

The purpose of this post is to explain why the picture above, showing mostly people of color calling for a “people’s Fed” and “full employment,” makes so much sense. Plus, I can show off some findings from a new paper on the topic. Here’s an idea: How about I interview myself?

Q: Who and where are those people in the photo above, and what are they up to? Since when do protesters get wound up about the Federal Reserve and interest rates?

A: They’re members of the Fed Up campaign, a group that was formed at the intersection of two critical insights. One, the Federal Reserve wields great economic power, but they have often weighted the interests of banks and finance over those of the most disadvantaged workers. Two, as I’ll show below, the benefits of full employment flow disproportionately to the very workers who have been left behind.

They protested last week at Jackson Hole, Wyoming, where the Fed has an annual meeting to discuss their work. Even as the economy closes in on full employment, Fed Up is leaning on the Fed to continue to hold interest rates down and to be more representative of broader interests, as the benefits of a tighter labor market still haven’t reached many of their members, while there’s no evidence of inflationary threats.

Q: Wait up. I thought we were already at full employment?

A: Nuh-uh. The unemployment rate, at 4.9 percent, is about at the rate the Fed believes is the lowest jobless rate consistent with stable inflation. But Fed Chair Janet Yellen, a careful observer of this point, recognizes that there’s still slack in the job market, generated both by millions of involuntary part-time workers and a still-depressed labor force participation rate. Also, as I show in my new paper, it’s important to the workers represented by the Fed Up campaign that we not only get to full employment, but stay there.

Q: Can you show us why full employment is so important to these folks?

A: It so happens I can (what a coinky-dink!). The first figure below shows the results of a model that predicts nominal wage growth based on labor market slack. First, note how changes in slack do a good job of predicting movements in this wage measure (see paper for data and modeling details). Second, the end of the figure simulates what would happen if we hit full employment — wages that are growing at about 2.5 percent would grow a point faster — or even surpassed it, which would further boost wage growth. Given that full employment conditions have been rare over the past 35 years (see Figure 1 in my paper; we’ve been at full employment only 30 percent of the time since 1980), thoroughly squeezing the slack out of the job market is necessary to push back on wage stagnation, on inequality and to make up for long-term losses.

This figure refers to average wages, but other results from the paper show that full employment helps low-wage workers the most. When unemployment falls from, say 10 to 5 percent, as it has since late 2009, real low wages get a 10 percent pop. But since unemployment is always pretty low for high-wage workers, their pay is less sensitive to its movements. My models find the relationship between real wages and unemployment to be insignificant for high-wage workers. That implies that full employment reduced inequality.

Q: Okay, I get the wage story. Did you uncover other benefits of full employment?

A: Another great question. It’s like you’re reading my mind! The figure below takes a different angle on this question of how full employment helps different groups. In this case, I took a sample of low-income, single-mom families and held their hourly wage constant and just considered the impact of very low unemployment in the number of hours they work in the paid labor market each year. The simulated increase you see at the end of the figure, which amounts to an extra $1,200 per year, is driven by sharp increases in their work hours when the job market tightens up. This result, by the way, belies the conservatives’ belief that low-income workers don’t respond to improved labor demand.

Q: I’m convinced! But here’s what I don’t get: Who could be against full employment? Seems like you and Fed Up are pushing through an open door.

A: Yes and no. First, the Fed’s mandate is to balance full employment with price stability, which begets the debate in which Fed Up is engaged about who gets hurt if, based on what looks to me like a phantom menace of inflation, the Fed unnecessarily taps the brakes on growth.

Second, there’s the political economy debate of how best to get to and stay at full employment. I’m sure Donald Trump and Paul Ryan would tell you eliminating the estate tax is the way to get there. My work suggests this is the policy agenda we want to pursue in this space:

— Add fiscal support to the monetary support; infrastructure investment (repair our schools, water systems, roads), for example.

— Push back on the strong dollar to boost our manufacturers’ international competitiveness; so, don’t raise interest rates and go after countries that manipulate their currencies to make their exports to us cheaper and ours to them more expensive.

— Fund a permanent, direct job-creation and -training program that reaches those most disconnected from the job market (those with criminal records, long histories of non-employment, stuck in “job desert” neighborhoods).

— Ramp up financial market oversight so as to short-circuit the “economic shampoo cycle:” bubble, bust, repeat.

JB: Well, thanks for a fun and informative interview!

JB: You know, you really need to get out more.

JB: Really? Why? Let’s talk some more.

JB: Seriously, dude…step away from the keyboard.