Economic Modeling in the Post Great Recession Era

CHAPTER 7 Labor Market Evolution Implications for Private-Sector and Public-Policy Decision Makers

One of the distinguishing characteristics of monetary policy in the United States as opposed to other central banks is the Federal Reserve’s dual mandate of maximum employment and price stability. While many other major central banks are commissioned solely with the goal of price stability, that is, a healthy rate of inflation, the Federal Reserve seeks to control inflation along with what can often be a conflicting goal of seeking full employment. Why, then, focus on full employment?

Employment as a policy priority first came to light during the Great Depression when widespread unemployment exacerbated the decline in demand, production, and the general standard of living. Public works programs under the New Deal offered some relief, but periods of uncomfortably high unemployment continued to occur in subsequent business cycles. The Humphrey-Hawkins Full Employment Act in 1978 formalized employment as a federal government policy priority and required the Federal Reserve to pursue full employment alongside price stability when formulating monetary policy.

The idea of full, or maximum, employment is an important gauge of output and price pressures. A labor market that is far from full employment, characterized by high unemployment, suggests an underutilization of resources in the economy. Not only does high unemployment lead to workers struggling to earn a living, but also indicates ...