What is “Full Employment” and How Will We Know When We’ve Reached It?

For the past few weeks, the Fed has been wavering on the decision to raise the interest rate. One of the key components to making this decision is employment.

The unemployment rate is at 5.1%, which has, in the past, indicated almost full employment. However, this statistic does not factor in some critical elements:

  • Discouraged workers
  • Underutilized workers
  • Demographic effects

These and other statistics paint a less optimistic picture about the country’s state of employment. The Atlanta Fed have created alternative measures that could better indicate our current status.

The Atlanta Fed uses the prime-age employment-to-population ratio to define the state of the labor market. It isn’t perfect, but it reduces the chances of demographic change due to aging muddling the data.

Another muddy measure is resource utilization. Full employment is more that full utilization of resources. Being employed doesn’t mean being employed in the most productive occupation in which potential is fully realized.

Despite attempts to provide clarity, the decision on monetary policy will have to be made without complete information.