“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 labour market is as tight as it can be without runaway price rises. But there is more art than science to such guesses. Indeed, rich-world natural rates have moved around over time—from below 5% after the second world war to much higher levels in the 1970s and 1980s, and back to lower levels more recently—leaving economists scratching their heads at each turn.
It is thought that the natural rate depends mostly on what economists label “frictional unemployment”. Unemployment rates may wiggle only a bit from month to month, but beneath that calm, labour markets are a roiling mess. Each month millions of workers leave their jobs and millions more find new ones. For a portion of the workforce there is a gap between one and the other—frictional unemployment. A background hum of joblessness reflects the delay in matching jobseekers with jobs.
The hum varies in pitch. Some factors gum up the works and increase friction. The higher frictional rate of the 1970s and 1980s was partly the result of a change in the nature of employment: good jobs in industries like manufacturing dwindled, while low-wage service employment exploded. The psychological and economic pain associated with this shift meant that workers losing good jobs would stay unemployed for longer, in the hope that better, high-wage opportunities would eventually turn up. Barriers to job switching, like occupational licensing, can also push up the natural rate. So can unions, by protecting the status of employed workers, or by pushing up wages so that hiring more people becomes uneconomical. Other factors grease the gears. The lower natural rate of the 1990s might have been the result of more efficient hiring thanks to information technology, or of the growth of temporary-help jobs, which sponged up some workers facing career transitions.
The boundary between that sort of long-term structural unemployment and the temporary, cyclical kind is anything but clear-cut. In the 1980s and 1990s economists argued that short-term unemployment could become long-term unemployment under the right (ie, wrong) circumstances. This “hysteresis” could emerge as employed workers negotiated favourable conditions for themselves, deterring firms from hiring new workers. Or laid-off workers might find their skills and links with the labour force eroding over time, making it harder to find new jobs as good as their old ones.
But hysteresis also works in reverse, at least to some degree. As America’s unemployment rate has fallen below 5%, wage growth has at long last begun to accelerate. As pay rises, people who had given up hope of a worthwhile job begin to look for work again. As firms find it harder to hire new workers, firms might offer existing workers more hours, or convert part-time or temporary posts to full-time or permanent positions. They might even try to raise output per worker, by investing in training or in new equipment.
The rub is that policymakers cannot know how much slack remains in the system until they see inflation accelerating—the very thing they want to stop. That suggests one reason workers in advanced economies are not as fully employed as they should be is an excessive aversion to inflation. Another is government’s failure to tackle obstacles—of geography, education or regulation—standing between would-be workers and would-be employers.
If the goal of full employment, however, is a happy society, policymakers must pay attention to the quality as well as the quantity of jobs on offer. Employment rates in subsistence societies are extremely high. More people would be in work were governments to withdraw unemployment benefits and repeal the minimum wage. Yet society would be worse off for it.
Technological change complicates matters. A scarcity of workers could drive investment in machines, allowing each worker to produce more. Yet it might also encourage full automation. In a new paper, Daron Acemoglu and Pascual Restrepo, of the Massachusetts Institute of Technology, find that ageing economies, with shrinking workforces, do not seem to grow more slowly than younger economies, as many economists assume they should. Instead, automation picks up. Yet if robots can compensate for high retirement rates, how many younger workers might also be superfluous?
An age of mass technological unemployment is not upon us. But the definition of maximum employment should consider more than inflection points in inflation charts. Rather, governments need to consider the options available to workers: not just how easily they can find jobs they want, but also how readily they can refuse jobs they do not. By lifting obstacles to job changes and giving workers a social safety net that enables them to refuse the crummiest jobs, societies can foster employment that is not just full, but fulfilling.