Beyond The Phillips Curve: A Dynamic Approach To Communicating Assessments of “Maximum Employment”

Executive Summary

The Implications of the Fed’s Framework Revisions For The Fed’s Communication of Maximum Employment:

The Tradeoffs Between Maximum Employment and Stable Prices are Time-Varying and Context-Dependent

Scenarios That The Fed Should Be Well-Equipped To Communicate:

  1. 2015–2019: The Incoherence Of Going “Beyond Maximum Employment” Maximum employment can evolve and expand over time in a way that a unitary projection will miss; such progress should be welcomed.
  2. 2004–2006: Multi-Year Inflationary Dynamics May Imply Temporary Speed Limits, But Not Permanent Destination Limits. Inflationary dynamics can sometimes persist — even over a multi-year period — thereby constraining the feasible pace of progress, but such dynamics should not make the ultimate destination of full employment impossible to reach. Short and medium run constraints to employment imposed by inflationary pressures should be disentangled from the longer run possibilities for labor utilization.
  3. 2009–2012: Resisting Recessionary Revisions That Re-classify Cyclical Employment Shortfalls As Structural. Asymmetric treatment of labor market outcomes should imply upwardly mobile assessments of maximum employment that are still downwardly sticky to recessionary shocks.

The Fed’s Framework and Forward Guidance Warrant A Communications Revamp of “Maximum Employment”

Originally published here
Source: Bureau of Labor Statistics (BLS)
Originally published here
Source: BLS
Source: Organization for Economic Co-operation and Development (OECD), BLS

Tradeoffs Between “Maximum Employment” and “Stable Prices” Change With Context and Over Time

Source: BLS, Bureau of Economic Analysis (BEA)
Source: BEA
Source: Federal Reserve Board of Governors
Source: Federal Reserve Board of Governors
Source: Federal Reserve Board of Governors

Three Scenarios The Fed Should Be Well-Equipped To Communicate

  1. 2015–2019: The Incoherence Of Going “Beyond Maximum Employment”
  2. 2004–2006: Multi-Year Inflationary Dynamics May Imply Temporary Speed Limits, But Not Permanent Destination Limits
  3. 2009–2012: Resisting Recessionary Revisions That Conveniently Re-Classify Cyclical Employment Shortfalls

2015–2019: The Incoherence Of Going “Beyond Maximum Employment”

Source: Federal Reserve System, New York Times, Wall Street Journal
Source: BLS, Federal Reserve Board of Governors
Source: BLS
Source: BLS
Originally published here
Source: Census Bureau, Federal Reserve Bank (FRB) of Atlanta
Source: Census Bureau, Federal Reserve Bank (FRB) of Atlanta

2004–2006: Multi-Year Inflationary Dynamics May Imply Temporary Speed Limits, But Not Permanent Destination Limits

Source: BEA
Source: BLS, Census Bureau, BEA, FRB Atlanta
Source: FRB San Francisco, BEA, BLS

2009–2012: Resisting Recessionary Revisions That Conveniently Re-Classify Cyclical Employment Shortfalls

Source: BLS
  1. The internet is making it systematically easier to post more low-intensity openings for reasons independent of the business cycle, and
  2. Job posting sites might actually raise the price of posting an opening when labor markets tighten, misleadingly reducing the quantity of observed openings when recruiting intensity ramps up.

The Solution: Communicate The Dynamic and Multidimensional Nuances of Maximum Employment Assessments

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We write, crunch #’s, and tweet about the labor market and economic policy.

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Employ America

We write, crunch #’s, and tweet about the labor market and economic policy.

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