Chicago Fed Insights

What Does “Broad and Inclusive” Full Employment Mean in Practice?

May 6, 2022

By Chicago Fed staff writer

In August 2020, after a nearly two-year review, the Federal Reserve released an important update to the monetary policy framework that guides its work. Under the new framework, the Federal Open Market Committee (FOMC) will continue to pursue maximum employment, as directed by its dual mandate, and will consider maximum employment “a broad-based and inclusive goal.” 

On April 7, 2022, the Economic Mobility Project—a new initiative at the Chicago Fed—convened Federal Reserve policymakers and outside experts to discuss the new framework and what “broad-based and inclusive” might mean in practice.

The release of the new monetary policy framework followed a two-year review process in which Federal Reserve officials traveled across the country to hear more about how monetary policy affects people’s daily lives. At the same time, research economists throughout the Federal Reserve System have been increasingly able to use new and better data and methods to understand how economic forces have affected different groups of people.

For many, the American Dream is out of reach

In a presentation on how difficult it is for children in the United States to overcome the economic circumstances of their parents, senior economist Bhashkar Mazumder of the Chicago Fed shared compelling evidence that, despite what many believe, the American Dream is out of reach for many.

In the past, many people believed that income gaps between families disappeared within two or three generations. However today, using better, more comprehensive data that encompasses earnings for parents and their children over longer time periods, Mazumder and other researchers have shown that it might take five generations before the descendants of a family living in poverty would be expected to earn close to the national average.

“This suggests that there’s a radically different picture of mobility in American society today, and that we’re really not in this rags-to-riches in a generation type economy, as was more commonly thought,” said Mazumder.

Importantly, and relevant to conversations about inclusive employment, Mazumder’s research shows that rates of economic mobility differ drastically by race and geography.

“I would say the most salient finding is that Black American families are doubly disadvantaged,” he said, adding that Black families “experience both low upward mobility from the bottom and high downward mobility from the top.”

Citing a 2014 paper, Mazumder noted that children from Black families are about 24 percentage points less likely than White children to move out of the bottom quintile as adults. Black families are also 14 percentage points more likely to fall out of the top quintile than White families.

Mazumder also cited research by Harvard University’s Raj Chetty and Nathan Hendren and their co-authors showing massive geographical variation in rates of economic mobility, as well as evidence from time trends studies that economic mobility rates began to fall after 1980 as economic inequality began to rise.

In terms of why economic mobility has fallen, Mazumder cited a 2022 paper that shows there’s a rising payoff to more education, which can explain about 20% of the decline in economic mobility since around 1980.

Looking at changes in intergenerational mobility across generations of families, Mazumder also explained that the likelihood of being married has increasingly been tied to one’s parents’ income and that this change has contributed about 40% to the decline in intergenerational mobility in family income. For those born in the early 1960s who entered the labor market after the rise in inequality in the 1980s, having parents at the 75th income percentile made them 11 percentage points more likely to be married than someone with parents at the 25th income percentile.

Speaking to the disadvantages that make it harder for Black families than White families to see improved economic circumstances over time, Mazumder said there’s an opportunity to change things moving forward. The gap in intergenerational mobility by race “is a function of the policies that we choose,” he said. “And there are lots of studies of previous policies in the realms of education, health, and labor markets that suggest that policy can profoundly change this forecast,” according to Mazumder.

What does “broad and inclusive” mean in practice?

With low rates of economic mobility as context, three expert economists from outside the Federal Reserve System joined the event to share their perspectives on what the Fed’s new framework might mean for policymaking.

Although the panelists had different ideas about the role for monetary policy in creating a more inclusive labor market, they agreed that putting the new framework into practice means looking beyond the unemployment rate as a single indicator and taking a closer look at structural factors in the labor market. The panel was moderated by Washington Post columnist and editorial board member Heather Long.

Wendy Edelberg: Race and gender employment gaps are problematic, but monetary policy alone can’t address underlying structural factors.

Wendy Edelberg, director of the Hamilton Project at the Brookings Institution, stressed the importance of thinking about different ways to measure full employment, arguing that full employment, as a measure, can differ from “maximum optimal employment,”—a measure that would take into account employment-to-population ratios for different groups, among other things.

Edelberg also expressed skepticism that inclusive maximum optimal employment could be achieved through monetary policymaking at the Federal Reserve, saying “a hot labor market shrinks disparities, but doesn’t eliminate them.”

As a historical comparison, Edelberg pointed to increases in women’s labor force participation that she argued were driven by structural changes enabling more women to return to work. “Were we at maximum optimal employment in the late 1960s, when the unemployment rate was below 4%? Surely not. But given structural factors at the time, the labor market likely was near its potential full employment level,” Edelberg said.

Referencing recent work with colleagues at the Brookings Institution, she said that “creating true equality of opportunity will require structural changes to our institutions, policies, and attitudes, and for that we need fiscal policy.”

William Spriggs: Monetary policy can promote inclusive employment, and too many economists misunderstand how Black workers interact with the labor market.

William Spriggs, professor of economics at Howard University and chief economist of the AFL-CIO, said he thought the Fed should keep financial conditions accommodative so that more people would be brought back into the labor market.

Spriggs said that looking at how Black workers interact with the labor market can be very instructive for policymaking, noting the importance of looking beyond the unemployment rate and considering the labor force participation rate for Black workers.

“Unfortunately, too many economists see the Black–White unemployment gap as a skills gap,” Spriggs said. He said policymakers need to understand that many Black workers who might take a job are not counted in the unemployment rate because they are considered outside the labor force.

“Black workers are exceedingly sensitive in terms of their labor force participation to whether or not firms are really hiring. That insight gives the Fed a good barometer to look at,” Spriggs said.

He also noted that 70% of the people who have found a job in the past five to six months came from outside the labor force, and that the share of workers who were unemployed and leaving the labor force has been declining.

All of this is evidence, Spriggs argued, that our concept of maximum employment could move beyond accepting these frictions for certain groups and instead toward pursuing an economy that “makes those frictions begin to disappear.”

Michael Strain: Running a hot economy is not a good way to help vulnerable workers.

Michael Strain, director of Economic Policy Studies at the American Enterprise Institute, agreed with Edelberg that a hot labor market can partially improve employment prospects for people of color and workers with disabilities, but said that “full employment should be considered over a longer time horizon than just a few months.”

“I don’t think the Fed will be helping workers over the long term, especially lower income workers and traditionally vulnerable workers who often fare the worst during a downturn, by running the economy really hot, creating some opportunities for them, but then seeing the economy collapse,” said Strain.

He added, “I think we’re at an unhealthy point [in the labor market], in the sense that we’re at an unsustainable point.”

Strain said he thinks about full employment, in a non-technical sense, as “a situation where businesses are chasing workers, and where workers aren't chasing businesses.” He said businesses now “are just desperate for workers, and that creates a situation that isn’t sustainable. And it puts upward pressure on consumer prices, and it risks recession.”

Strain said he agreed with Spriggs that we should be aiming to restore the employment rate to what it was in 2001 and to increase wages, especially for low-wage workers, but “that’s more of a goal for fiscal policy than monetary policy,” he said, “especially given the state of the economy right now.”

Strain called on federal, state, and local policymakers to improve workforce productivity through improvements in education and job training. He also called for policies to draw people into the labor market, like the Earned Income Tax Credit, and for policies that make the labor market more competitive.

Perspectives from two Federal Reserve Bank presidents

To wrap up the event, Federal Reserve Bank Presidents Raphael Bostic (Atlanta) and Charles Evans (Chicago) joined the conversation with Long, responding to what they heard from outside experts and sharing their own perspectives on the Federal Reserve’s updated framework.

Raphael Bostic: Longer economic expansions allow groups that have not participated to participate more, but we can’t push too hard.

Raphael Bostic, president of the Federal Reserve Bank of Atlanta, said his vision of an inclusive economy is one where “everyone who wants to work is able to find work that is commensurate with their full potential.”

If that can be achieved, Bostic went on to say, “then our economy will be bigger: It will be more robust, it will be more resilient, and it'll be more inclusive, because we will see participation happening in parts of the economy [where] we’re not seeing it happen right now.”

Referencing a discussion about different ways to measure employment and labor force participation, Bostic said that regardless of what measure you use, things look better “across the board when an expansion lasts longer.”

“On the other hand,” he added, “if you push it too hard, there’s a chance that you will have to create some sharp reductions in economic activity.”

Finally, when asked if the Fed was experiencing “mission creep” by pursuing an inclusive economy, Bostic said no, adding that improving economic mobility is in line with the Fed’s maximum employment mandate.

The Fed’s aim, he said “is really to try to deploy our resources as effectively as possible to achieve our goals. And it’s just very clear in this instance, just right today, I would say, if you think about the imbalance between supply and demand, labor is a big part of that,” said Bostic.

Understanding what can be done to reduce that imbalance both now and in the future, Bostic said, will allow the Fed “to more fully achieve our mandate as we move forward.”

Charles Evans: There’s a lot of re-sorting in the labor market right now, but it’s not unhealthy.

Charles Evans, president of the Federal Reserve Bank of Chicago, said a strong understanding of the structure of the labor market is critical to advancing the Fed’s dual mandate. “It’s very important to have a measure of what you think full employment, maximum employment, [and] optimal maximum employment is.”

However, Evans said, he personally thinks it’s good to focus on eliminating employment shortfalls. “If we eliminate employment shortfalls, I don’t believe unemployment is necessarily too low.”

Asked if he thought that the labor market was definitely too tight, Evans said no, noting that what we’re seeing in the labor market is a lot of people with good opportunities to move to better jobs—a kind of “re-sorting.”

For businesses, “re-sorting, that’s going to look painful,” he said. “And I think there are just a lot of businesses where their business model probably isn’t going to work the way it used to. … I don't necessarily see it as unhealthy. I do say it’s a big challenge for businesses,” he added.

Finally, Evans said he’s of the opinion that most of the rise in inflation we’ve seen is tied to short-term supply disruptions and not necessarily overly accommodative monetary policy.

“I’m optimistic that we can get to neutral, look around, and find that we’re not necessarily that far from where we need to go,” Evans said, adding that “there’s a lot to be monitoring still.”

About the Economic Mobility Project

The Economic Mobility Project was formed at the Chicago Fed in 2022 to provide evidence-based research on the factors and policies that affect economic mobility to those who can enact meaningful change. At the project’s first event on inclusive full employment, Dan Sullivan, executive director of the Economic Mobility Project, spoke about the motivation for launching the project.

“Economists at the Chicago Fed have a long tradition of doing research on topics, such as inequality and intergenerational mobility, racial equity, education, health, and household financial decision-making, that are important for understanding what kinds of policies lead to greater economic mobility.”

Sullivan said while that work is often highly regarded in the academic world, it’s not always easily accessible to the policy community. The Economic Mobility Project aims to change that by sharing useful policy briefs and hosting events that bring together researchers and policymakers for productive dialogue.

Research briefs from the new project can be found on the Economic Mobility Project website. Full video from the project’s event on inclusive employment can be found here.

The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System.


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