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How Should We Think about Full Employment in the Federal Reserve’s Dual Mandate?

Remarks by
Lael Brainard
Member
Board of Governors of the Federal Reserve System
at the
Ec10, Principles of Economics, Lecture
Faculty of Arts and Sciences, Harvard University
Cambridge, Massachusetts
(via webcast)

February 24, 2021

I want to thank Jason Furman and David Laibson for inviting me to join your
economics class. I often found it difficult in introductory economics to connect the
abstract concepts in the textbooks to the real-world issues I cared about. So the one
message I hope you remember from today is that economics provides powerful tools to
enable you to analyze and affect the issues that matter most to you. 1
With jobs down by 10 million relative to pre-pandemic levels, one issue that
matters fundamentally to all of us is achieving full employment. So today I want to talk
about both the Federal Reserve’s responsibilities with regard to full employment and
different approaches to assessing where we are relative to that goal.
The belief that the federal government has a responsibility for full employment
has its roots in the Great Depression. It was given statutory expression at the end of the
Second World War when policymakers and legislators feared that the millions of
American soldiers returning to the labor market would face Depression-era conditions. 2
In the Employment Act of 1946, the Congress directed the federal government as a whole
to pursue “conditions under which there will be afforded useful employment for those
able, willing, and seeking work, and to promote maximum employment, production, and
purchasing power.” 3

I am grateful to Kurt Lewis, Mark Carlson, Christopher Nekarda, Edward Nelson, Ivan Vidangos, and
Nicholas Zevanove of the Federal Reserve Board for their assistance in preparing these materials. These
remarks represent my own views, which do not necessarily represent those of the Federal Reserve Board or
the Federal Open Market Committee.
2
From 1930 to 1940, the unemployment rate averaged 18 percent by one estimate. See G.J. Santoni
(1986), “The Employment Act of 1946: Some History Notes,” Review (Federal Reserve Bank of St.
Louis), vol. 68 (November), pp. 5–16, https://doi.org/10.20955/r.68.5-16.pdo.
3
The language of the act (quoted text in section 2) is available through FRASER on the Federal Reserve
Bank of St. Louis website at https://fraser.stlouisfed.org/title/employment-act-1946-1099. In 1945, the
staff at the Federal Reserve Board wrote a series of Postwar Economic Studies on the economic effects of
demobilization. The first study notes that “jobs are the main channel through which national welfare
reaches the individual.” See Emanuel Alexandrovich Goldenweiser (1945), “Jobs,” in Frank R. Garfield,
Emanuel Alexandrovich Goldenweiser, Everett Einar Hagen, and Board of Governors of the Federal
1

-2The postwar policy discussion raised important issues surrounding the definition
and measurement of full employment. In 1950, the Review of Economics and Statistics
published a symposium titled “How Much Unemployment?” which debated the accuracy
of the Census Bureau’s value for unemployment. 4 Dr. Palmer was a critical contributor
to the symposium. Palmer was a professor at Wharton, a fellow of the American
Statistical Association, a worldwide expert on manpower and labor mobility, and a
consultant with the Office of Statistical Standards. 5 She argued that “a single figure of
unemployment, regardless of how it is defined or derived, is inadequate as a basis for
selection among [policy] programs. Inherent in the phenomena being measured are so
many degrees and kinds of labor force activity that no single definition or classification
can adequately summate them.” 6
With concerns about employment again on the rise, in 1976, Senator Hubert
Humphrey joined with Congressman Augustus Hawkins to sponsor legislation promoting
full employment. 7 An amendment to the Federal Reserve Act in 1977 specifically
assigned monetary policy responsibility for promoting “the goals of maximum
employment, stable prices, and moderate long-term interest rates,” commonly referred to

Reserve System, eds., Jobs, Production, and Living Standards (Baltimore: Waverly Press), p. 1,
https://fraser.stlouisfed.org/title/698.
4
For an introduction to the symposium, see Seymour E. Harris (1950), “Introduction,” Review of
Economics and Statistics, vol. 32 (February), p. 49.
5
See Gertrude Bancroft McNally (1967), “Gladys L. Palmer, 1895–1967,” American Statistician, vol. 21
(December), p. 35.
6
See Gladys L. Palmer (1950), “Unemployment Statistics as a Basis for Employment Policy,” Review of
Economics and Statistics, vol. 32 (February), pp. 70–74 (quoted text on p. 70).
7
For a discussion of the evolution of the Federal Reserve’s statutory responsibilities, see Ben S. Bernanke
(2013), “A Century of U.S. Central Banking: Goals, Frameworks, Accountability,” speech delivered at
“The First 100 Years of the Federal Reserve: The Policy Record, Lessons Learned, and Prospects for the
Future,” a conference sponsored by the National Bureau of Economic Research, Cambridge, Mass.,
July 10, https://www.federalreserve.gov/newsevents/speech/bernanke20130710a.htm.

-3as the dual mandate. 8 This amendment was followed by the Humphrey-Hawkins Full
Employment and Balanced Growth Act, passed in 1978, requiring that the Federal
Reserve regularly report to the Congress on how monetary policy was supporting the
goals of the act. 9
Congressman Hawkins was a prominent advocate of full employment,
emphasizing its importance not only for providing a job to every American seeking work,
but also for reducing poverty, inequality, discrimination, and crime and improving the
quality of life of all people. 10 A congressman from southern California, Hawkins was
one of the founders of the Congressional Black Caucus and played a major role in the
drafting of the Civil Rights Act of 1964. He was also an undergraduate economics major.
Hawkins’s views were influenced by his experience representing the Watts
neighborhood in Los Angeles, where depression levels of joblessness persisted even
when the nation overall was experiencing good times. He was also influenced by the
work of economists such as Robert Browne and Bernard Anderson, which highlighted the
persistent disparity between Black and white employment and the connection between

As noted by Frederic Mishkin, “Because long-term interest rates can remain low only in a stable
macroeconomic environment, these goals are often referred to as the dual mandate; that is, the Federal
Reserve seeks to promote the two coequal objectives of maximum employment and price stability.” See
Frederic S. Mishkin (2007) “Monetary Policy and the Dual Mandate,” speech delivered at Bridgewater
College, Bridgewater, Va., April 10 (quoted text in paragraph 3),
https://www.federalreserve.gov/newsevents/speech/mishkin20070410a.htm.
9
A few other central banks have an explicit employment mandate that has the same weight as their pricestability mandate, such as the Reserve Bank of Australia and the Reserve Bank of New Zealand. For most
central banks, price stability is the single objective of monetary policy (Bank of Canada, Riksbank, and
Bank of Japan) or the priority objective (for example, European Central Bank and Bank of England).
Economic research suggests that inflation outcomes have been as good, or better, in the United States
compared with jurisdictions in which employment either is not a monetary policy objective or is
subordinate to price stability. See Eric S. Rosengren (2014), “Should Full Employment Be a Mandate for
Central Banks?” Journal of Money, Credit and Banking, vol. 46, suppl. 2 (October), pp. 169–82.
10
See Helen Lachs Ginsburg (2012), “Historical Amnesia: The Humphrey-Hawkins Act, Full Employment
and Employment as a Right,” Review of Black Political Economy, vol. 39 (October), pp.121–36.
8

-4elevated Black unemployment and economic challenges facing Black communities. 11
Hawkins emphasized that “without genuine full employment it would be impossible to
eliminate racial discrimination in the provision of job opportunities.” 12 The HumphreyHawkins Act noted that “increasing job opportunities and full employment would greatly
contribute to the elimination of discrimination based upon sex, age, race, color, religion,
national origin, handicap, or other improper factors.” 13
The centrality of achieving full employment for all Americans is as pressing today
as it was in 1930, 1946, and 1977. The measurement challenges highlighted by Dr.
Gladys Palmer and the racial disparities highlighted by Robert Browne and Bernard
Anderson are just as relevant in today’s economy. And the statutory dual mandate
assigned to monetary policy has ensured an unwavering, strong focus on maximum
employment as well as price stability at the Federal Reserve in research and measurement
no less than policymaking.
The Federal Reserve recently concluded a review of our monetary policy
framework, which included extensive outreach to a broad range of people over the course
of 2019. In 14 Fed Listens events in communities around the country, we heard
testimonials that would have sounded strikingly familiar to Congressman Hawkins. At a
time when the national headline unemployment rate was at a multidecade low,
community and labor representatives and educators noted “it’s always a recession” in

See Bernard E. Anderson (2008), “Robert Browne and Full Employment,” Review of Black Political
Economy, vol. 35 (January), pp. 91–101.
12
See Augustus F. Hawkins (1975), “Full Employment to Meet America’s Needs,” Challenge, vol. 18
(November/December), pp. 20–28.
13
The complete original language of the act (quoted text in section 2B (4)) is available through FRASER
on the Federal Reserve Bank of St. Louis website at https://fraser.stlouisfed.org/title/full-employmentbalanced-growth-act-humphrey-hawkins-act-1034.
11

-5their communities. 14 They challenged whether the overall economy could be
characterized as at “full employment” while unemployment remained in the double digits
in their communities.
Reflecting this input, and in light of persistently below-target inflation, low
equilibrium interest rates, and low sensitivity of inflation to resource utilization, we made
several important changes to the monetary policy framework. Two changes have
particular relevance for the employment leg of the dual mandate. 15 The new framework
calls for monetary policy to seek to eliminate shortfalls of employment from its
maximum level, in contrast to the previous approach that called for policy to minimize
deviations when employment is too high as well as too low. The new framework also
defines the maximum level of employment as a broad-based and inclusive goal assessed
through a wide range of indicators.
So how should we assess this broad-based and inclusive concept of maximum
employment? When discussing aggregate indicators about the labor market, people tend
to focus on the headline U-3 measure of the unemployment rate. 16 Although the
unemployment rate is a very informative aggregate indicator, it provides only one narrow
measure of where the labor market is relative to maximum employment. Recalling
Gladys Palmer’s dictum, I would not recommend relying on any single indicator, but

See Board of Governors of the Federal Reserve System (2020), Fed Listens: Perspectives from the
Public (Washington: Board of Governors, June),
https://www.federalreserve.gov/publications/files/fedlistens-report-20200612.pdf.
15
See Lael Brainard (2021), “Full Employment in the New Monetary Policy Framework,” speech delivered
at the Inaugural Mike McCracken Lecture on Full Employment, sponsored by the Canadian Association for
Business Economics (via webcast), January 13,
https://www.federalreserve.gov/newsevents/speech/brainard20210113a.htm.
16
This measure is the number of unemployed persons divided by the size of the labor force. People in both
categories must be 16 years of age or older.
14

-6rather consulting a variety of indicators that together provide a holistic picture of where
we are relative to full employment.
So let us start by seeing what insights we gain by disaggregating the
unemployment data into different groups of workers. The unemployment rate has
improved very rapidly from its peak of 14.8 percent last April to 6.3 percent today. But
this number is closer to 6.8 percent when taking into account a substantial number of
people on temporary layoff, who have been misclassified as “employed but on unpaid
absence” but instead should be counted as unemployed.” 17
Disaggregating the overall unemployment rate reveals that workers in the lowest
wage quartile face Depression-era rates of unemployment of around 23 percent. 18 In
part, this rate likely reflects the concentration of lower-wage jobs in service industries
that are strongly reliant on in-person contact, or at least in-person work, while a larger
proportion of higher-wage jobs are currently being performed remotely or with reduced
levels of in-person contact.
There is also important information in the disaggregation of unemployment by
different racial and ethnic groups. Figure 1 shows the prime-age unemployment rate
overall and on a disaggregated basis. 19 There are notable persistent gaps between
17
Since March 2020, the Bureau of Labor Statistics (BLS) has instructed its household survey interviewers
to classify employed persons who are absent from work due to temporary, pandemic-related business
closures or cutbacks as being unemployed on temporary layoff. During this period, however, some
workers affected by the pandemic who should have been classified as unemployed on temporary layoff
were instead misclassified as employed but not at work. Each month, the BLS provides an estimate of the
likely size of this effect on the unemployment rate. More information is available on the BLS website at
https://www.bls.gov/covid19/employment-situation-covid19-faq-january-2021.htm.
18
For more information on this analysis, see the box “Disparities in Job Loss during the Pandemic” in
Board of Governors of the Federal Reserve System (2021), Monetary Policy Report (Washington: Board
of Governors, February), pp. 12–14, https://www.federalreserve.gov/monetarypolicy/2021-02-mprsummary.htm.
19
Prime age refers to ages 25 to 54. I focus on this age range because of how important those working
years are for individuals’ overall careers and because labor market metrics calculated over workers in this
age range help control for the aging of the population.

-7different racial and ethnic groups, and the sizes of those gaps tend to vary over the
business cycle.
For example, historically, the ratio of the Black unemployment rate to the white
unemployment rate is around 2 for prime-age workers. On average, a 1 percentage point
increase in the white unemployment rate is accompanied by a 2 percentage point increase
in the Black unemployment rate. This gap narrows considerably the longer an expansion
progresses. At the beginning of 2015, a time when many economists believed the overall
unemployment rate had reached its “normal” rate, the gap between the Black and white
prime-age unemployment rates stood just under 5 percentage points, roughly at its
average level since 1972. By September 2019, that gap had reached a historical
minimum of 1.7 percentage points, and the gap between the Hispanic and white primeage unemployment rates had fallen to 0.3 percentage point.
The unemployment gaps between racial and ethnic groups widened again during
the pandemic. Currently, for prime-age individuals, the gaps between the white
unemployment rate and the Black and Hispanic unemployment rates are roughly 4
percentage points and 3 percentage points, respectively.
The unemployment rate obscures important information about people leaving and
entering the workforce. Each adult in the population is classified as employed,
unemployed, or not in the labor force. The unemployment rate is the number of
individuals who are not currently working but are actively looking for a job, divided by
the size of the labor force, which includes only those people who are either working or
actively seeking work:
𝑈𝑈 =

𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈
.
𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿 𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹

-8Changes in labor force participation contain important information about the
strength of the labor market that is not captured in the unemployment rate. The labor
force participation rate (LFPR) is the number of individuals who are either working or are
seeking work, divided by the working-age population:
𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿 =

𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿 𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹
.
𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃

When we take into consideration the more than 4 million workers who have left the labor
force since the pandemic started, as well as misclassification, the unemployment rate is
close to 10 percent currently—much higher than the headline unemployment rate of 6.3
percent—and similar to the peak unemployment rate following the financial crisis. This
is shown in Figure 2.
A decline in participation by prime-age women is an important contributor to the
overall participation decline. Some portion of the decline reflects the increase in
caregiving work at home with the shutdown of schools and daycare due to COVID-19.
On average over the period from November 2020 to January 2021, the fraction of primeage respondents with children aged 6 to 17 who were out of the labor force for caregiving
was about 14 percent, up 1-3/4 percentage points from a year earlier. For mothers, the
fraction who were out of the labor force for caregiving was 22.8 percent, an increase of
2.4 percentage points from a year earlier, while for fathers the fraction was 2.2 percent,
an increase of about 0.6 percentage point. 20 If not soon reversed, the decline in the

The percentages are staff calculations based on the microdata from the January Current Population
Survey. For more information on this analysis, see the box “Disparities in Job Loss during the Pandemic”
in Board of Governors, Monetary Policy Report, pp. 12–14, in note 19.

-9participation rate for prime-age women could have longer-term implications for
household incomes and potential growth. 21
While there are long-term structural trends in participation, such as population
aging, there are also cyclical dynamics that are important for our assessment of maximum
employment. The two panels in figure 3 show prime-age unemployment and labor force
participation over the previous recession and recovery. Following the onset of the global
financial crisis, as the number of unemployed people was rising, the size of the labor
force was also contracting, pushing the numerator of the unemployment rate up and the
denominator down. When the unemployment rate started to decline at the end of 2010,
this decline in part reflected unemployed people dropping out of the labor force through
2013. As the labor market healed further, prime-age LFPR leveled out and started to
increase at the end of 2015. The subsequent seemingly modest decline in the
unemployment rate from 4.3 at the end of 2015 to 3 percent at the end of 2019 was much
more significant, taking into account that more than 3-1/2 million prime-age workers
joined or rejoined the labor force during that period.
This brings me to figure 4 and the employment-to-population (EPOP) ratio, which
is the number of individuals employed divided by the working-age population:
𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 =

𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸
.
𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃

See Olivia Lofton, Nicolas Petrosky-Nadeau, and Lily Seitelman (2021) “Parents in a Pandemic Labor
Market,” Federal Reserve Bank of San Francisco Working Paper 2021-04. (February) (2020),
https://www.frbsf.org/economic-research/publications/workingpapers/2021/04/?utm_source=mailchimp&utm_medium=email&utm_campaign=working-papers, and Lael
Brainard, “Achieving a Broad-Based and Inclusive Recovery,” speech delivered at “Post-COVID—Policy
Challenges for the Global Economy,” Society of Professional Economists Annual Online Conference,
October 21, https://www.federalreserve.gov/newsevents/speech/brainard20201021a.htm.
21

- 10 The EPOP ratio synthesizes the information contained in the unemployment rate and
LFPR. For instance, as you can see in figure 4, a decline in participation almost entirely
offset the decline in unemployment in 2010 and 2011, leaving the prime-age EPOP ratio
essentially flat at 75 percent. The EPOP ratio then improved steadily over the subsequent
seven years, moving up to 80.4 percent in late 2019.
As the effects of the virus and measures to combat it took hold of the economy,
the EPOP ratio plummeted last April, and, after staging a sharp but partial recovery,
improvements in the prime-age EPOP ratio have moderated in recent months. A glance
back at figure 3 shows that the reductions in employment last spring were accompanied
by many prime-age workers leaving the labor force, and the participation rate among
prime-age workers has declined further since last May. The prime-age EPOP ratio
currently stands at 76.4 percent, well below the 80 percent level that was reached during
each of the past two expansions.
Figure 5 shows the patterns in the EPOP ratio for prime-age workers in different
racial and ethnic groups. 22 Following the Global Financial Crisis, the Black–white EPOP
gap opened to more than 10 percentage points in mid-2011 before shrinking to under
5 percentage points as labor markets tightened further during 2018 and 2019. In contrast,
the Hispanic–white EPOP gap was smaller than the Black–white gap, and it fluctuated in
a much narrower range over the business cycle.
During the pandemic, labor market performance as shown by the EPOP measure
has been fairly similar for Black and Hispanic prime-age workers and markedly worse
than for white workers. Research indicates that Black and Hispanic workers are
The Bureau of Labor Statistics makes disaggregated EPOP data from the Current Population Survey
available through online tools found on the bureau’s website at https://www.bls.gov/data.

- 11 overrepresented in industries particularly hard hit by the pandemic, such as hotels and
restaurants. 23 It also shows that Black and Hispanic workers are overrepresented in
essential industries at lower pay, and that they are significantly less likely to be able to
telework. 24
Figure 6 shows one more EPOP snapshot, this time for prime-age women overall,
as well as for Black and white subgroups. Following the financial crisis, a gap opened up
between the prime-age EPOP ratios for Black and white women. That gap closed in
2015, and employment for both groups surged over the next four years. Between January
2015 and February 2020, the EPOP ratios for white and Black prime-age women each
increased roughly 5 percentage points, reaching historical highs in the months just before
the onset of the pandemic. As the pandemic took hold in the subsequent months, once
again a gap opened up between the EPOP ratios for white and Black women, though the
current gap of roughly 2 percentage points is not as large as in the previous downturn.
While the EPOP ratio is a strong indicator of the extensive margin in the labor
market, or how many people are working, there is also important information in the
intensive margin—that is, how much work each person is doing. The part-time for
economic reasons (PTER) indicator shown in figure 7 measures those who are working
part time because they are unable to find a full-time job or whose hours have been
reduced and who would prefer full-time employment. 25 This indicator is an important

See Connor Maxwell and Danyelle Solomon (2020), “The Economic Fallout of the Coronavirus for
People of Color,” Center for American Progress, April 14,
https://www.americanprogress.org/issues/race/news/2020/04/14/483125/economic-fallout-coronaviruspeople-color.
24
See Hye Jin Rho, Hayley Brown, and Shawn Fremstad (2020), A Basic Demographic Profile of Workers
in Frontline Industries (Washington: Center for Economic and Policy Research, April),
https://cepr.net/wp-content/uploads/2020/04/2020-04-Frontline-Workers.pdf.
25
According to the Bureau of Labor Statistics, this category includes people who gave an economic reason
when asked why they worked 1 to 34 hours during the survey’s reference week. Their usual hours of work
23

- 12 measure of labor market slack, which tends to jump rapidly during recessions and
improve more slowly than headline unemployment during recoveries. PTER jumped
during the financial crisis as workers who were unable to secure full-time employment
moved to part-time work, accounting for more than half of the increase in involuntary
part-time work during 2008. 26
Today there are 6.0 million people working part time who would prefer full-time
work, up 1.6 million relative to the pre-COVID level. The Bureau of Labor Statistics has
six alternative measures of labor underutilization, the most expansive of which is the U-6
measures, which adds to the headline unemployment rate those employed part time for
economic reasons, along with all persons marginally attached to the labor force as a
percentage of the civilian labor force. The U-6 measure stood at 11.1 percent in
January. 27
Figure 8 shows the large amount of cyclical variation across PTER for several
racial and ethnic groups. The incidence of involuntary part-time work was especially
notable for Hispanic workers at the trough of the Great Recession, nearing 12 percent of
employment and almost double its rate before the recession. This gap between Hispanic
and white PTER narrowed substantially during the recovery and fell to just above
1 percentage point in the summer of 2019. Research indicates that gaps in involuntary

may be either full or part time. Economic reasons include the following: slack work, unfavorable business
conditions, inability to find full-time work, and seasonal declines in demand. People who usually work part
time and were at work part time during the reference week must indicate that they want and are available
for full-time work to be classified as part time for economic reasons.
26
For more information, see Tomaz Cajner, Dennis Mawhirter, Christopher Nekarda, and David Ratner
(2014), “Why Is Involuntary Part-Time Work Elevated?” FEDS Notes (Washington: Board of Governors
of the Federal Reserve System, April 14), https://dx.doi.org/10.17016/2380-7172.0014.
27
Persons marginally attached to the labor force are those who currently are neither working nor looking
for work but indicate that they want and are available for a job and have looked for work sometime in the
past 12 months.

- 13 part-time employment rates remain for Blacks, as well as Hispanics, relative to whites
after controlling for age, education, marital status, and state of residence, although
education and occupation can explain a portion of the gap for Hispanics. 28
Before concluding, I would like to point to two other labor market indicators that
provide useful evidence of the extent of labor market slack. The quits rate, shown in
figure 9, is a measure of voluntary separations that provides information about how
confident people are that they will be successful in finding a new job they prefer and,
relatedly, of how aggressively firms are pursuing talent. 29 Research indicates that the
quits rate and wage growth are highly correlated, suggesting that these voluntary job-tojob transitions reflect individuals moving up a “job ladder” to higher-paying jobs. 30 The
quits rate fell rapidly during the 2008 recession as workers’ options became more limited,
then recovered slowly, only surpassing its pre–financial crisis level of roughly 2.5 percent
in 2018. In contrast, the bounceback from the pandemic trough has been much more
robust, with quits already reaching 2.6 percent in December. As undergraduates, the
quits rate may soon become relevant to you, as research indicates that job-to-job
transitions are most frequent for young workers and that this measure has trended down
in recent decades. 31
See Tomaz Cajner, Tyler Radler, David Ratner, and Ivan Vidangos (2017), “Racial Gaps in Labor
Market Outcomes in the Last Four Decades and over the Business Cycle,” Finance and Economics
Discussion Series 2017-071 (Washington: Board of Governors of the Federal Reserve System, June),
https://dx.doi.org/10.17016/FEDS.2017.071.
29
See the Job Openings and Labor Turnover Survey, which can be found on the Bureau of Labor Statistics
website at https://www.bls.gov/jlt/home.htm.
30
See R. Jason Faberman and Alejandro Justiniano (2015), “Job Switching and Wage Growth,” Chicago
Fed Letter 337 (Chicago: Federal Reserve Bank of Chicago),
https://www.chicagofed.org/publications/chicago-fed-letter/2015/337.
31
For evidence that job-to-job transition is utilized most when young, and that job dynamism for the young
has declined, see Canyon Bosler and Nicolas Petrosky-Nadeau (2016), “Job-to-Job Transitions in an
Evolving Labor Market,” FRBSF Economic Letter 2016-34 (San Francisco: Federal Reserve Bank of San
Francisco, November), https://www.frbsf.org/economic-research/publications/economicletter/2016/november/job-to-job-transitions-in-evolving-labor-market.
28

- 14 Finally, measures of compensation are closely monitored for evidence on labor
market slack. Figure 10 shows the 12-month growth rate of the employment cost index
for total compensation for private industry workers (ECI). Just as quits fell during the
Great Recession, so did the ECI. About two years after the onset of the financial crisis,
the ECI moved up slightly in 2010 and then remained essentially flat at an annual growth
rate of 2 percent over a five-year period between 2010 and 2015. There was a pickup of
the ECI at the end of 2015, which coincided with the turning point in the prime-age
LFPR. Even so, the growth rate of the ECI did not return to the levels experienced before
2008.
Unlike the other indicators I have discussed, the pandemic appears to have made
fairly little imprint on the ECI. The ECI declined slightly over the second and third
quarters of 2020 and moved up in the fourth quarter. It is difficult to draw any firm
conclusions from these developments; while the ECI is not as susceptible to composition
effects as some other measures, smaller composition effects are still possible. 32
So, what conclusions can we draw from this high-level overview of a variety of
labor market indicators, their current readings, and their performance in the previous
expansion? First, the headline unemployment rate by itself can obscure important
dimensions of labor market slack, so it is important to heed Dr. Palmer’s dictum and
consult a broad set of aggregated and disaggregated measures. Second, groups that have
faced the greatest challenges often make important labor market gains late in an

For example, the ECI data are assembled at an industry-occupation level of granularity. If at the outset
of the pandemic, firms in a particular industry laid off their newest, lowest-paid staff in a particular
occupational category first, the compositional change could lead compensation in that industry and
occupation to increase on average.

- 15 expansion, consistent with Augustus Hawkins’s emphasis on the importance of full
employment for all Americans.
So where does this leave us today? Jobs are still down by 10 million relative to
pre-COVID levels, and COVID has disproportionately harmed certain sectors, groups of
workers, businesses, and states and localities, leading to a K-shaped recovery. The fiscal
support that is enacted and expected will provide assistance to vulnerable households,
small businesses, and localities and a significant boost to activity when vaccinations are
sufficiently widespread to support a reopening of in-person services. Monetary policy
will continue to provide support by keeping borrowing costs for households and
businesses low.
The assessment of shortfalls from broad-based and inclusive maximum
employment will be a critical guidepost for monetary policy, alongside indicators of
realized and expected inflation. The Federal Open Market Committee has said it expects
the policy rate to remain in the current target range until labor market conditions have
reached levels consistent with the Committee’s assessments of maximum employment
and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for
some time. It has noted that asset purchases will continue at least at the current pace until
substantial further progress has been made toward the maximum-employment and
inflation goals.
In assessing substantial further progress, I will be looking for sustained
improvements in realized and expected inflation and examining a range of indicators to
assess shortfalls from maximum employment. I will be looking for indicators that show
the healing in the labor market is broad based, rather than focusing on the narrow

- 16 aggregate U-3 unemployment rate, in light of the significant decline in labor force
participation since the spread of COVID and the extremely elevated unemployment rate
for workers in the lowest wage quartile.
For nearly four decades, monetary policy was guided by a strong presumption that
accommodation should be reduced preemptively when the unemployment rate nears its
normal rate in anticipation that high inflation would otherwise soon follow. But changes
in economic relationships over the past decade have led trend inflation to run persistently
somewhat below target and inflation to be relatively insensitive to resource utilization.
With these changes, our new monetary policy framework recognizes that removing
accommodation preemptively as headline unemployment reaches low levels in
anticipation of inflationary pressures that may not materialize may result in an
unwarranted loss of opportunity for many Americans. It may curtail progress for racial
and ethnic groups that have faced systemic challenges in the labor force, which is
particularly salient in light of recent research indicating that additional labor market
tightening is especially beneficial for these groups when it occurs in already tight labor
markets, compared with earlier in the labor market cycle. 33 Instead, the shortfalls
approach means that the labor market will be able to continue to improve absent high
inflationary pressures or an unmooring of inflation expectations to the upside.
Inflation remains very low, and although various measures of inflation
expectations have picked up recently, they remain within their recent historical ranges.
PCE (personal consumption expenditures) inflation may temporarily rise to or above 2

See Stephanie R. Aaronson, Mary C. Daly, William L. Wascher, and David W. Wilcox (2019), “Okun
Revisited: Who Benefits Most from a Strong Economy?” Brookings Papers on Economic Activity, Spring,
pp. 333–75, https://www.brookings.edu/wp-content/uploads/2019/03/aaronson_web.pdf.
33

- 17 percent on a 12-month basis in a few months when the low March and April price
readings from last year fall out of the 12-month calculation, and we could see transitory
inflationary pressures reflecting imbalances if there is a surge of demand that outstrips
supply in certain sectors when the economy opens back up. While I will carefully
monitor inflation expectations, it will be important to see a sustained improvement in
actual inflation to meet our average inflation goal.
Today the economy remains far from our goals in terms of both employment and
inflation, and it will take some time to achieve substantial further progress. I look
forward to the time when this K-shaped recovery becomes a broad-based and inclusive
recovery and when vaccinations are widespread, the services sector springs back to life,
and all Americans enjoy the benefits of full employment. I cannot think of a more
meaningful time to be studying economics or a more important time to be thinking about
the different ways to assess our shared goal of full employment.

Figure 1. Prime−Age Unemployment Rate
Monthly

Percent
All
Black
Hispanic
White

17
16
15
14
13
12
11
10
9

Jan. 2021

8
7
6
5
4
3
2
1

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

Note: Three−month moving average of the unemployment rate. Prime age refers to ages 25 to 54. The gray shaded bars indicate periods of business recession as defined by
the National Bureau of Economic Research. The two shaded recession periods extend from January 2008 through June 2009 and March 2020 through the data's end date.
Source: Bureau of Labor Statistics.

Figure 2. Official and Alternative Unemployment Rates
Monthly

Percent
24

Published unemployment
+ misclassification error
+ labor force decline since Feb. 2020

9
Jan. 2021

Jan.

Feb.

Mar.

Apr.

May

June

July
2020

Source: Bureau of Labor Statistics; Board staff calculations.

Aug.

Sept.

Oct.

Nov.

Dec.

Jan.
2021

Figure 3. Prime−Age Labor Market Indicators
Unemployment Rate

Monthly

Percent

14
12
10
8

Jan. 2021

6
4
2

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

Labor Force Participation Rate

Monthly

2021
Percent

Jan. 2021

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

Note: Three−month moving average of the unemployment rate and labor force participation rate. Prime age refers to ages 25 to 54. The gray shaded bars indicate periods of
business recession as defined by the National Bureau of Economic Research. The two shaded recession periods extend from January 2008 through June 2009 and March 2020 through
the data's end date.
Source: Bureau of Labor Statistics.

Figure 4. Prime−Age Employment−Population Ratio
Monthly

Percent

Jan. 2021
76

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

Note: Three−month moving average of the employment−population ratio. Prime age refers to ages 25 to 54. The gray shaded bars indicate periods of business recession as
defined by the National Bureau of Economic Research. The two shaded recession periods extend from January 2008 through June 2009 and March 2020 through the data's end date.
Source: Bureau of Labor Statistics.

Figure 5. Prime−Age Employment−Population Ratio
Monthly

Percent
All
Black
Hispanic
White

Jan. 2021
74

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

Figure 6. Employment−Population Ratio, Women Ages 25 to 54
Monthly

Percent

All
Black
White
74

Jan. 2021
70

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

Note: Three−month moving average of the employment−population ratio. The gray shaded bars indicate periods of business recession as defined by the National Bureau of
Economic Research. The two shaded recession periods extend from January 2008 through June 2009 and March 2020 through the data's end date.
Source: Bureau of Labor Statistics.

Figure 7. Part−Time for Economic Reasons
Monthly

Percent

5
Jan. 2021
4

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

Note: Three−month moving average of the percent of individuals in part−time employment for economic reasons. The gray shaded bars indicate periods of business recession
as defined by the National Bureau of Economic Research. The two shaded recession periods extend from January 2008 through June 2009 and March 2020 through the data's end
date.
Source: Bureau of Labor Statistics.

Figure 8. Part−Time for Economic Reasons
Monthly

Percent
All
Black
Hispanic
White

Jan. 2021

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

Figure 9. JOLTS Quits Rate
Monthly

Percent

Dec. 2020

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

Note: Three−month moving average of the Job Openings and Labor Turnover Survey (JOLTS) quits rate. The gray shaded bars indicate periods of business recession as defined
by the National Bureau of Economic Research. The two shaded recession periods extend from January 2008 through June 2009 and March 2020 through the data's end date.
Source: Bureau of Labor Statistics.

Figure 10. Employment Cost Index for Total Compensation for Private Industry Workers
Quarterly

12−month growth rate, percent

2020:Q4

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

Note: The gray shaded bars indicate periods of business recession as defined by the National Bureau of Economic Research. The two shaded recession periods extend from
January 2008 through June 2009 and March 2020 through the data's end date.
Source: Bureau of Labor Statistics.