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What Is Inclusive Full Employment?

DAN SULLIVAN: Hello. My name is Dan Sullivan, and I'm the executive director of the Chicago Fed's new Economic Mobility Project. I'm very pleased to welcome you to our first event, what is inclusive full employment. Please note that today's event is being recorded and will be posted on our website, along with a meeting summary.

Before describing today's agenda, let me say just a few words about the Economic Mobility Project and why we decided to launch it. As part of their work supporting the Fed's monetary policy mission, our economists study many aspects of the economy. It turns out that quite a bit of that research has implications for economic policies of all sorts, including those that may affect economic mobility.

Indeed, economists at the Chicago Fed have a long tradition of doing important 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.

Often, that work is highly regarded in the academic world, but it is not always easily accessible to the policy community. We hope to improve on that through the creation of clearly written policy briefs and by hosting events that bring together researchers and policymakers for productive dialogue. Of course, we won't be endorsing any specific policy proposals. Our goal is simply to increase the value of our researchers' work by bringing it to the attention of policy audiences that may find it valuable.

DAN SULLIVAN: Hello. My name is Dan Sullivan, and I'm the executive director of the Chicago Fed's new Economic Mobility Project. I'm very pleased to welcome you to our first event, what is inclusive full employment. Please note that today's event is being recorded and will be posted on our website, along with a meeting summary.

Before describing today's agenda, let me say just a few words about the Economic Mobility Project and why we decided to launch it. As part of their work supporting the Fed's monetary policy mission, our economists study many aspects of the economy. It turns out that quite a bit of that research has implications for economic policies of all sorts, including those that may affect economic mobility.

Indeed, economists at the Chicago Fed have a long tradition of doing important 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.

Often, that work is highly regarded in the academic world, but it is not always easily accessible to the policy community. We hope to improve on that through the creation of clearly written policy briefs and by hosting events that bring together researchers and policymakers for productive dialogue. Of course, we won't be endorsing any specific policy proposals. Our goal is simply to increase the value of our researchers' work by bringing it to the attention of policy audiences that may find it valuable.

We're very happy that Kristen Broady has joined us as the mobility director's first director. Kristen, who was previously at the Brookings Institution, as well as at several universities, has done important research on a number of topics related to economic mobility. She also has great experience communicating that research to our policy community.

At the conclusion of today's event, you'll hear from Kristen about some of our future plans. But first, let me say a little bit about today's event. As you might know, the Fed spent much of 2019 and early 2020 developing a new framework for its long-run monetary policy strategy. This involved a lot of technical economic analysis, but we also held meetings all across the country and met with a wide range of organizations to hear how monetary policy affects people's daily lives.

The result was the FOMC's August 2020 Framework Statement, which included several notable changes from the previous framework, including one that we want to focus on today, which was the FOMC declared that its maximum employment mandate is broad and inclusive.

To better understand what that focus on inclusivity should mean for the actual conduct of monetary policy, we have three distinguished economists here today to offer their thoughts. After that, we'll hear from President Raphael Bostic of the Atlanta Fed and our own Chicago Fed President Charlie Evans.

But first, to set the stage and highlight the importance of research supporting greater economic mobility and inclusion, Bhash Mazumdar is going to give us an overview of his and others' research on the topic of intergenerational economic mobility. For more than 20 years, he and other researchers have been using increasingly better data and stronger research designs to understand the important question of how much a child's economic success is tied to that of their parents. Bhash.

BHASH MAZUMDAR: Hey, great. Thank you, Dan. [INAUDIBLE] share my slides. OK. So thank you, Dan. I'm very pleased to be here today to talk to you about some of my research and that of others on the topic of intergenerational economic mobility.

So my goal in this presentation is to basically share with you some high-level facts and insights about economic mobility that we've learned over the past few decades that hopefully will give us some important background information about the state of opportunity and mobility in the US.

I want to start by describing what the consensus view of intergenerational economic mobility was just a few decades ago and described how it's changed as we've gotten access to better data and used improved research methods. So I would say until the 1990s, much of the research suggested that the quote, unquote, American dream was alive and well, that there was ample opportunity to move across the income distribution, regardless of where your parents started.

However, that research was done using intergenerational data sets that typically contained just a single year of income for measuring the income of parents and kids and often used unrepresentative samples. For example, a sample of just one single state. So based on this kind of data and methodology, researchers estimated the statistical association between parent income and child income and found a relatively low estimate of 0.2.

So what does this mean? In practice, this means that roughly 20% of the income gaps between, say, any two families would remain a generation later on average but that a full 80% of those gaps would dissipate within a generation. So you can imagine that once you play this out over another generation or two, income gaps would pretty much disappear. And that's what led the economists Gary Becker and Nigel Tomes to write in a 1986 paper that I put out on the slide here that almost all earnings advantages or disadvantages of ancestors would be wiped out within three generations.

So this old view of mobility began to change with newer studies in the 1990s and 2000s. So for example, with better data-- that is panel data. So this is data that's collected year after year for the same families-- we could now get a much better read on the true long-term economic status of both parents and children. And what's important is that this reduces the noise in the data and allows us to get much more accurate assessments about the state of mobility.

This slide highlights a 2005 paper of mine that was part of my PhD dissertation some time ago, and I basically found that once you used a very long time stream of income to capture the longer-term economic status of parents and kids-- so I used up to 16 years of data using high-quality administrative data from Social Security earnings records-- I now found that estimate of the association was greater than 0.5. So much higher than the 0.2 that led to Gary Becker and Nigel Tomes conclusion.

And so I did an exercise-- and I show this example on the slide-- that if you took a typical family living in poverty, that it would take on average five generations before their descendants would approach the national average income level. So based on this kind of estimate, I concluded that 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.

We still might want to know, however, how does the US fare compared to other countries and particularly to other advanced economies. So as more data became available in other countries, we had studies like this take place throughout the world, and we got a clearer picture by the mid-2000s. So the chart on this slide is taken from a paper by the economist Miles Corak, and it shows what's called the Great Gatsby curve. So this is a name that was coined by the late economist Alan Krueger, who was the head of the Council of Economic Advisors under President Obama.

And this chart basically shows the relationship between inequality, which runs along the x-axis in this figure, and intergenerational income persistence, kind of that association measure I talked about, on the y-axis. So as that number goes up, mobility goes down. So there's this negative relationship. As you have higher inequality, you have less mobility.

And as you can see from where the US is on this chart, it's not at a particularly great spot. We have both high inequality and lower mobility, particularly when you compare us to most other advanced economies. So for example, you can see the Nordic countries grouped together in the lower left part of this figure. And even economies such as Japan and Germany both have lower inequality and significantly more intergenerational mobility than we do.

I next want to turn to thinking about differences in intergenerational mobility by race within the US. So this figure is taken from a paper of mine published in 2014 where I created estimates of both upward mobility and downward mobility for both white and Black families.

For upward mobility, I basically calculated how likely it would be for a child whose parents were in the bottom quintile-- that's the bottom 20% of the income distribution-- to move out of that bottom 20% as an adult. And similarly, I calculated how likely it would be for a family that-- for a child from a family that started in the top quintile-- the top 20%-- to move down, to get a measure of downward mobility.

And as you can see, the results in this figure are pretty striking. For Black families, children were about 24 percentage points less likely to move out of the bottom quintile as adults. And Black families were also 14% more likely to move out of the top quintile than white families.

When we think about the implications of this sort of double whammy of Black families being disadvantaged both at the bottom and the top, it's pretty critical for thinking about how we might expect the racial inequality to evolve going forward. So in this paper, I did an exercise where I made the assumption that these dynamics of low upward mobility and high downward mobility for Black families would continue into the future generations, just to see what that would imply. And that exercise basically showed that under those assumptions, Black families would remain perpetually disadvantaged.

However, I think there are important reasons to think that this does not have to be the case and doesn't have to be our future. It's a function of the policies that we choose going forward. And there are lots of studies of previous policies in the realms of education, health, and labor market that suggests that policy can profoundly change this forecast.

I now want to transition to a different aspect of thinking about intergenerational mobility, and that's how it varies by geographic location. It turns out there are also important differences based on where children are raised in the US. The map on this slide is taken from a somewhat famous recent paper by Raj Chetty, Nathan Hendren, Pat Klein, and Emmanuel Saez, and they use population-wide administrative tax records for the US to show that there's quite a bit of variation in intergenerational mobility depending on where you grew up.

So for example, a child who was born in poverty who grew up in the 1980s and 1990s in, say, Boulder, Colorado, could expect to get close to the median level of income by the time they were adults. But a similar kid who grew up in Cincinnati, Ohio, would move up a bit, but would still be around the 35th percentile-- 38th percentile as an adult. And the color coding on this map basically shows you the darker areas are areas with less mobility. And so you can see, there's quite a bit of geographic spread.

The authors also highlight five of the most important factors that they found can account for this variation in mobility. And so the areas with high mobility tend to have less residential income and racial segregation. They tend to have lower levels of income inequality. They have better K through 12 schools. Higher levels of social capital. By that, we mean measures of the quality of social networks in the community and the community capital levels. And finally, they have greater levels of family stability. For example, lower levels of the fraction of families that are headed by a single parent.

The final aspect of mobility I want to talk about is time trends. So as I showed earlier, the Great Gatsby curve showed that there was this negative relationship between inequality and intergenerational mobility. And given the fact that we saw inequality in the US begin to rise pretty sharply after 1980, we might have expected that intergenerational mobility began to fall. And several studies appear to show evidence consistent with this pattern, including several of my own studies.

The figure in this slide is from one of my papers, and the blue line basically shows that there was an important increase in intergenerational persistence starting around 1980, again suggesting a decline in mobility after 1980. And this corresponds to a sharp increase in the payoff to getting more education, particularly to getting a college degree, as shown in the red line in this figure.

So more carefully understand the causes for this decline in mobility around 1980. In a recent paper with my co-author John Davis, we show that there are two important factors. One is that there's the rising payoff to more schooling, as I alluded to. And we found that could explain about 20% of this decline. We also found a pretty striking four-fold increase in the association between the likelihood of getting married and one's parents' income, and that could also account for about 40% of the decline in intergenerational mobility and family income that we see.

So to summarize, I think the research over the last few decades has pretty dramatically changed our view about intergenerational income mobility in the US. There's now a pretty clear consensus that the US has relatively low mobility when compared to other advanced economies. And it also appears that mobility declined around 1980, when we saw an increase in inequality by many measures.

Finally, there are important differences in mobility by both race and location. And I would say the most salient finding is that Black American families are doubly disadvantaged. They experience both low upward mobility from the bottom and high downward mobility from the top. Hopefully this provides an important set of basic facts that should inform our understanding of the state of opportunity in America. Thank you very much.

DAN SULLIVAN: Thank you, Bhash. That was very helpful, if a bit sobering. Bhash didn't mention it, but one thing I find fascinating is that the association he finds for the lifetime incomes of children with that of their parents is pretty close to the association of children's height with that of their parents. So there's just a lot of persistence in the level of families' income over time.

Economic mobility just isn't as great as one might hope. However, as Bhash mentioned, that doesn't mean that has to be the case in the future, that there are policies that might be able to improve things. And our Economic Mobility Project will be looking at research related to such policies in the coming years.

Now let me turn things over to Heather Long to moderate our next two sessions. Heather is a columnist and a member of the editorial board at "The Washington Post." Over her career, she has covered the Fed and numerous other economic issues. Recently, she's written extensively on labor market developments in the wake of the pandemic. Heather.

HEATHER LONG: Thank you, Dan. As Dan said earlier, the Federal Reserve went through nearly a two year process to review its goals and its core framework, and it met with everybody from business leaders and economists to labor leaders and educators and more to really think through how should the Fed define its two key goals?

And what they came up with in the end of the summer of 2020 was that full employment should continue to be a goal, but full employment should be, quote, broad-based and inclusive. And then inflation-- the other key goal, keeping prices relatively stable-- should average around 2% over the long term.

Obviously, 2020 was a heck of a year to implement and roll out a new framework, and it's certainly being tested right away in this current environment, this very unusual recovery we're in that's been very fast. We have unemployment almost back to pre-crisis levels. At the same time, the labor force participation rate remains lower than it was pre-crisis, meaning we have fewer workers in the economy today than we did in early 2020. And of course, at the same time, we have high inflation, at a 40-year high.

So to try to make sense of this new framework and how the Fed should be implementing and thinking about it in the environment we're in now, I'm thrilled to be joined by three top economic thinkers. That's Wendy Edelberg, the director of the Hamilton Project at the Brookings Institute, William Spriggs, an economics professor at Howard University and the chief economist at the AFL-CIO, and Michael Strain, the director of economic policy studies at the American Enterprise Institute. Welcome to you three.

WILLIAM SPRIGGS: Thank you.

HEATHER LONG: So let's kick it off with the big question here. I'd like to hear from each of you. Why don't we go maybe Wendy, Michael, and then Bill. How do you each define inclusive full employment? What does that actually look like in practice? And how should the Fed think about implementing that goal? Wendy, why don't we start with you.

WENDY EDELBERG: Sure. So employment to population ratios-- for example, something that incorporates both labor force participation and the unemployment rate. We can compare employment population ratios to other periods to give us a sense of how strong the labor market is relative to its full employment level in light of structural factors.

What I mean by full employment is what the labor market can sustain without problematic shortages or problematic wage pressure. And I want to break down to three parts of that and draw a distinction between full employment and what I would call maximum optimal employment.

So first, history may not represent full employment. The labor market, particularly for some groups, may have been below its potential during whatever our comparison period is. So for example, the employment to population ratio for prime age women was at a relatively high level right before the pandemic. But that level was not at its highest. That had been reached in 2000. So was the employment to population ratio for prime age women at its potential right before the pandemic? It's hard to know.

Second, the factors influencing full employment outcomes can change over time. The employment to population ratio is over a percentage point below its pre-pandemic level. But the pandemic seems to be holding back the labor market's potential. It's lowering labor force participation among some groups, and that's really a structural factor, which brings me to my third point.

The labor market is strongly affected by structural factors. An obvious example of this is the increase in women's labor force participation that occurred over decades. That increase wasn't driven by greater aggregate demand leading to greater labor demand that pulled women in. The increase was driven by structural factors that in essence lowered the cost and increased the return to women working. So 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.

Fed policy can clearly influence aggregate demand and thus labor demand. And a strong labor market can definitely help to break down structural factors. We saw this in 2018 and 2019. That gave us good evidence that when the unemployment rate for Black workers fell to a historical low, it did that partly because aggregate demand and labor demand was so strong. But the Fed can't do all the work to truly get the economy back to maximum optimal employment.

Work I did with Stephanie Aaronson and Mitchell Barnes that leveraged work Stephanie had previously done with other co-authors shows that even though strong labor markets are associated with significant reductions in racial and ethnic disparities and unemployment rates, by itself, a strong labor market is highly unlikely to eliminate the racial and ethnic unemployment rate gaps that have been remarkably persistent over decades.

A hot labor market shrinks disparities, but it doesn't eliminate them. And unfortunately, the disparities just widen again when the economy cools. So creating true equality of opportunity will require structural changes to our institutions, our policies, our attitudes. And for that, we need fiscal policy. And I've lost you all.

HEATHER LONG: I don't think so. Michael, are you able to jump in?

MICHAEL STRAIN: I am to jump in. I agree with a lot of that. So let me perhaps stress some different points. Heather, you asked how do we think about full employment in a practical sense. The first answer that came to mind is a situation where businesses are chasing workers, where workers aren't chasing businesses. And a situation where businesses are chasing workers, you're not going to get a better jobs program than that.

I think Wendy, of course, is correct about a really hot cyclical period of the labor market eroding some structural obstacles. Wendy mentioned the shrinkage of some race gaps in the years leading up to the pandemic. I think it's important to note it wasn't just race gaps that shrunk.

You saw employment rates for workers with disabilities increase considerably in the years prior to the onset of the pandemic. You saw businesses changing their attitudes toward hiring workers who had been formerly incarcerated. Businesses much more willing to hire higher workers with criminal records.

You saw businesses change their hiring practices around other sorts of policies, of hiring policies, that may have a disparate impact on lower-income Americans and minorities. Wendy's right to distinguish between these cyclical and structural factors, of course. But you can make some progress on structural factors, as Wendy said, by accurately understanding the cycle.

I think full employment should be considered over a longer time horizon than just a few months. I don't think that 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.

The Fed would not be helping those workers by running the economy really hot, creating some opportunities for them, but then seeing the economy collapse under the weight of overheating or the economy shrink as a consequence of the Fed having to pump the brakes too hard. So I would encourage, just as the Fed is trying to think about inflation over a longer time horizon, I would encourage the Fed to think about full employment over a longer time horizon.

And then I think similarly, when we think about full employment, we should think about sustainable full employment, for similar reasons relative to the risks to lower income households and lower wage workers from overheating.

WILLIAM SPRIGGS: Well, I think the Fed needs to concentrate on maximum employment. I think the Fed was well-served to understand that if you only look at the top line, the decomposition of the unemployment rate looking at subgroups can't yield very great insights into the problems that the labor market has.

It is true that Black workers face discrimination and that will create disparities between Black and white unemployment rates. Unfortunately, too many economists think of the Black-white unemployment rate as a skills gap. There is no significant gain, whether you look at it by education or test scores, in understanding the Black-white unemployment gap.

Instead, it's helpful to understand the structures of the labor market and how it works. And for the purpose of the Fed, this is very instructive, because workers who face those types of barriers are going to be more sensitive to whether jobs are actually being created or not, whether firms are really hiring or not hiring.

And so the result is that 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 big barometer to look at. And it's instructive, because when the labor market turns sour, Black labor force participation collapses.

The key here is that the Black to white 2-to-1 unemployment rate remain stable precisely because of the variation in Black labor force participation. So when employers are really hiring, you see the Black labor force participation respond rather quickly.

And that gives a quick insight to the Fed of something else, which is if you only look at unemployment to prices as a measure, you're going to miss the key ingredient, and that is labor force participation itself is endogenous. And therefore looking only at unemployment rates is going to give you a very misleading picture of what's the true nature of who's really available.

If you look at the current recovery that we're in, you will notice that a huge share of those who are doing the labor force flow into employment are coming from not in the labor force. 70% of the people in the last five, six months who say I found a job came from not in the labor force-- not from unemployment. And the share of those who are unemployed who are leaving the labor force-- going to not in the labor force-- has been declining.

And so the sense that, well, they won't come back, or they won't come back soon, clearly means you have to look at these other indicators. Black workers provide that canary in the coal mine. They are an obvious group that faces these barriers. But there are other groups, and the COVID crises alerted us to some of those insights. It's just not always clear, because we don't get to disaggregate our numbers well enough long enough.

So just as an example, I think many people were shocked when the Asian-American unemployment rates skyrocketed at the moment of the crisis because the unemployment rate for Asian-Americans tends to be very low. But that opened people's minds up that, unlike the stereotype that they're all engineers and doctors and whatever, a large share of Asian-Americans are in low wage service sector jobs, personal service jobs. Nail salons. Restaurants. Dry cleaners.

And that insight helps you understand that Asian-Americans have longer unemployment duration even than African-Americans typically. The long-term unemployed are highly heterogeneous, and so it's hard to understand what's driving the long-term unemployed. That heterogeneity makes it hard for us to pinpoint which of the frictions are the cause.

But this fact for Asian-Americans and the fact that their long-term unemployment duration comes from even their own bifurcation highlights that within the labor market, there are still these sticky points. The things that aren't clearing. This does not mean that we just fluff it off and say, well, other people can settle that.

It means that if you are consistently near full employment, maximum employment, you harm these very groups that are facing that disparity, and you appreciate that this is a deadweight loss. And most times in our economy, the unemployment rate for Black people who have associate degrees approximates that for whites who are high school dropouts. This is a huge deadweight loss. Who wants to run an economy in which people with associate degrees are still finding it hard to connect to a job?

When the labor market tightens, that gap does close, and then Blacks who have associate degrees have unemployment rates that look like white high school graduates. Do we say, well, that's still structural. We don't care. Or do we understand that our concept of what is maximum employment incorporates accepting these frictions or by wanting an economy that makes those frictions begin to disappear. I bring that up because not just that the gaps got smaller, but in the fall, before COVID, we have the unemployment rate of Hispanic men and white men equal.

Many people say, oh, it's always 50% higher. Hispanics just have a higher unemployment rate. There's nothing you can do about it. And if you try and do anything about it, then the dragons at the end of the earth is going to eat up the economy, and inflation is going to go through the ceiling. And everybody's going to be worse off.

It didn't happen. It didn't happen. And even when the gaps were narrowing for Black and white workers prior to COVID, we weren't experiencing accelerating inflation. So the notion that when you approach these barriers that people think are independent of how we even think of maximum employment, it really means that we're missing an opportunity to reach optimal employment for the United States.

HEATHER LONG: Thank you. Yeah, it's really fascinating. Each of you has brought up the need to really think in a numeric way about the what does inclusive employment mean as being more focused on labor force participation or employment to population ratios, as opposed to the unemployment rate. I know we in the media are guilty sometimes of putting too much emphasis on the unemployment rates, which doesn't capture the full picture.

Each of you has also really stressed these structural factors in the economy that are persistent, like discrimination, that need to be addressed both by the Fed and also outside of the Fed. So I guess let me ask Wendy-- and I've got a question for each of you. Wendy, help me understand. Are we at full employment now, in your eyes?

WENDY EDELBERG: So given the structural challenges that we have that are not all that well understood, which is to say that we know that labor force participation right now is depressed. It seems intuitive that it's because of the pandemic and it's because people are still reluctant to work in face-to-face industries. Or they're taking care of sick family members or children.

But it's actually difficult to really nail down that evidence concretely. But nonetheless, it does look like structural factors are holding down labor force participation. And given that, yes, I would say that we're roughly around full employment. So job openings have been running at 7% of total employment for the last eight months. Quits at 3%. Those are both their highest levels since we started collecting that data in 2010.

It's particularly high in the leisure and hospitality industry, where wage gains have been quite strong. So I think we have a lot of evidence that given structural factors, labor demand right now is beyond what is sustainable.

HEATHER LONG: Fascinating. Michael, I want to sort of put a different version of that question to you. At the Fed press conference in March just a few weeks ago, Fed Chair Powell actually called the labor market right now, quote, "unhealthy," that it had gotten to a point where, given what Wendy was saying, these cyclical factors almost looked out of whack. Do you agree with that? Are we at an unhealthy point?

MICHAEL STRAIN: Yes. I think we're at an unhealthy point in the sense that Wendy said, which is that we're at an unsustainable point. The Fed and monetary policy cannot make people less skittish about going to work in an in person job. Monetary policy can't stop my three-year-old from having to quarantine at home when she's exposed to somebody who has COVID-19. And monetary policy can't convince a guy who is 63 years old, who is sitting on a really healthy savings account balance, to go back to work when that person has decided to retire early.

Of course, the Fed can affect all three of those at the margin through higher wages in the labor market. But there are a lot of intermarginal people in those situations, and I think it's appropriate, as Wendy did, to think of those more as structural factors. Look at the labor market as a whole. Wages for non-supervisory workers are growing in the last print. It's 6.7%.

That's extremely rapid. I mentioned earlier how do you kind of think about full employment in a non-technical sense. If you think about full employment as a situation where businesses are chasing workers, and where workers aren't chasing businesses, it is hard to think of a better indication of the amount of competition in the labor market. It's hard to think of a better indication of the lengths that businesses are going to to attract and retain workers than looking at the really rapid wage growth we have.

Again, 7% wage growth for non-supervisory workers. In leisure and hospitality, average wages have been growing in the kind of 10%, 11%, 12%, 13% range. Businesses 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.

It risks recession either because consumer demand collapses under the weight of high prices and business investment spending collapses under the weight of higher producer prices or because the Fed, in an effort to slow the economy but not throw it into reverse, makes a mistake and accidentally causes a recession.

And when we have a downturn, again, the workers who are the most sensitive to the business cycle are lower wage workers and workers in low income households. And so that's the sense in which I think the current situation in the labor market is unhealthy. The sense is that it is not sustainable.

HEATHER LONG: Bill, I'm curious to get your take on what you're hearing from Wendy and Michael and this sort of mantra that's happening from the markets that the labor market is basically at full employment and pretty much everything that's not structural has been addressed. Do you agree with that, or do you see it differently?

WILLIAM SPRIGGS: I see it very differently. First off, for most of the last few months-- it's only in the last couple of months where Black workers have finally found success, when labor force participation really started to pick up for Black workers. As they constantly heard, oh, we're hiring. We're hiring. Only to find out, not really. We're not really hiring. If we were really hiring, then as the Black labor force participation initially picked up, then the Black unemployment rate would have plummeted. It's only in the last couple of months that we've seen that success from the increased labor force participation for Blacks.

But as to wages, let's remember that we have 21 states rapidly increasing their minimum wages in response to the long period we refused to raise the minimum wage at the Federal level. These states are raising their minimum wages by large amounts because they're on the path to either $12 an hour in some states or $15 an hour in other states. So the result is that low wage workers are suddenly getting, in some states, 10%, 12% mandated wage increases because the minimum wage is going up.

When the minimum wage goes up, then we get to see proof, as many of us have long argued, of monopsony. Those firms are suddenly confronted with a big shift in the overall wage offer that workers get to look at. The internal wage structure at some of those firms are highly challenged because they are monopsonies. And the response is that workers are going to switch jobs.

So job switching is ignited when I'm at my firm. The minimum wage goes up to $11 an hour, and I'm making $10.90. Suddenly I'm making $11. Now I'm going to be upset, because $11 is the minimum. I was above the minimum before. Now I'm at the minimum. I start looking at other firms, and how are they responding to these minimum wage changes. The monopsonists get caught flat-footed, and they start losing workers. Because they find out yes, there really is a market, and you're no longer in control of the market. And they have to respond to it. Some of them are good. Some of them are bad.

Every time the minimum wage goes up in an expansion, we see this ripple effect that takes place because it also induces job to jobs switches, which are good for the economy, because it means we're reallocating workers from monopsonists and low productivity firms towards those that are competitive firms paying competitive wages and who are more productive than the other firms. This is a good thing. It's going to take place.

If the Fed is going to react every time we beat back some of the bad things that are allowed in labor markets when you have high unemployment rates, we're going to have problems. The Fed has to accept that we are undoing some of the monopsony-- the bad effects of monopsony in our labor market. That's what's taking place.

You've got to remember, we've changed our labor force. At the beginning of the 21st century-- of this century-- we had 15 million manufacturing workers. We had 9 million restaurant workers. When the pandemic hit, we had lost 3 million manufacturing workers. We were down to 12 million manufacturing workers. And we had gained 3 million restaurant workers. We had 12 million restaurant workers.

So of course, if you change the minimum wage, when these workers are a much bigger share of the labor force and are as important as manufacturing workers, it's going to look like, oh, wages are really doing something. But it's the minimum wage, and it's the adjustment that we're going to go through as the states finalize what they're going to do, reach the $12 or $15 or wherever they're headed. We have this little turbulence. It's going to go through this for a little while.

But no, we are not near maximum. If we don't get our nation back to the employment to population ratio for prime age workers that we had in 2001, going forward, we face huge problems. Because we have a slower population growth. We have the aging of our nation. And as the workforce gets older, and we have people who are retired. This is going to be a big problem that we don't have the employment to population ratio where it was in 2001.

And let's remember, the gains we're observing in labor force participation are older workers returning to the labor force as well. Again, Black workers are just the canary in the coal mine. They are giving you the signal that workers are ready and willing to come when you're serious about hiring. And we're seeing older workers come back into the labor force, the ones that people have been writing off and saying, oh, they're retired, and they're drawing their bonds and whatever. But they're coming back into the labor force. The Fed needs to be patient to allow that to happen.

HEATHER LONG: Thanks.

WENDY EDELBERG: Heather, can I just jump in? I want to say one-- do you mind?

HEATHER LONG: Yep.

WENDY EDELBERG: So the issue on what's happening with wage pressure and the relationship between wage pressure and inflation. I want to just add some nuance to the points that Michael was making. So we have seen extraordinary wage gains in some sectors, such that real wages have actually even gone up, in the leisure and hospitality sector and in the retail trade sector, in particular.

But in fact, wages have not kept pace with inflation in most other industries. So yes, we have seen wage pressure. But the pressures that we're seeing right now in the economy that, in my mind, are like flashing red lights where the Fed needs to act, the source of that is not what's coming from wage pressure. Just to say it again, most workers have actually seen real wage declines in the past year. Not all. And in fact, lower income workers have seen real wage gains.

So I want to make it a distinct point between the wage pressure I'm seeing and the fact that I think that we're at full employment. I think we're at full employment. I am not hugely worried about the wage pressure that we've seen. And in fact, most of the inflation pressure that we've seen, it's actually hard to pin that on wages. It looks like it's coming from other factors.

HEATHER LONG: Yeah, let me pick up on that.

WILLIAM SPRIGGS: I just want to say, thank you, Wendy, because that's exactly right. Again, those restaurant workers are getting these big boosts. Inflation is much worse for food consumed at home than it is for food consumed away from home. So the one area where we do have wages rising at very high levels that's not causing the wage pressure, the price pressures we're looking at.

HEATHER LONG: Yeah. Wendy, I want to ask you. Obviously, so much of monetary policy is trade offs. You have to balance the labor market with the inflation pressures that we're seeing. How concerned are you, as the Fed prepares to raise interest rates pretty aggressively this year, that we could see a backslide in the labor market? We could see more people losing jobs, even, and unemployment rising.

WENDY EDELBERG: Well, the monetary policymakers have a hard job ahead of them. We all know that soft landing-- being able to slow the economy perfectly without causing a recession-- is a tall order. But I am very confident that they are aware of those risks, and they're working hard to create a soft landing.

I think one of the things that's going to be hard is that the pandemic ebbing will do some of the work. And so the Fed will have to think about how to be responsive to that in appropriate ways. So I think it's absolutely right that given what we're facing with the pandemic now and the structural issues that we've talked about now a lot, it is appropriate for the Fed to be taking its foot off the gas, and they need to act.

But to the degree that the pandemic ebbing brings back labor supply and to the degree that it increases demand for services, but it's not increasing demand for services too much, because we have a lot of waning-- fiscal support is waning. So the waning of fiscal support and the ebbing of the pandemic I think may do a lot of the work to bring down inflation. And so the Fed will just have to be responsive to that and not over-respond because it's not taking those factors into account.

HEATHER LONG: Yeah. And then we have the war in Ukraine, which is another big uncertainty. Michael and Bill, I want to turn to you for our final words here. So many of you have brought up these longer-term structural problems that are such a big part of holding back many people from getting jobs or getting the jobs they deserve.

Can you both say-- Michael, we'll start with you, and then Bill, we'd love to close out with you. What long-term challenges does the US economy truly need to address, either through monetary or fiscal, to reach truly inclusive full employment? What would be-- I mean, there's obviously a million things you could cite, but what are the two or three at the top of your list that you think, I really wish policymakers either at the Fed or in Congress and the White House or state houses would address a couple of these. Michael, let's start with you.

MICHAEL STRAIN: Well, I'll just kind of pick up on the discussion of the employment rate and of wage growth to answer that question. Right now we have an employment rate of 80% among workers ages 25 to 54. That's pretty close to where it was before the pandemic hit and roughly a point and a half below its peak in 2001.

I completely agree with Bill that we need to get back to where we were in 2001, and that should be a goal for policy. I think that's more of a goal for fiscal policy than monetary policy, especially given the state of the economy right now. And I agree with Wendy that we should be shooting for a situation where inflation-adjusted real wages are growing faster than they were prior to the pandemic and certainly faster than they are now, because for most workers, they're negative right now.

And I think there are many ways to achieve those goals. I would highlight two. One is to increase the productivity of the workforce, and that comes through state houses doing a better job with K through 12 education. It comes from the federal government and state governments doing a better job with job training.

I think there are some promising developments in worker training. The past several decades have been-- well, the '70s, '80s, and '90s were pretty disappointing, in terms of the government's ability to increase the skills of the adult workforce. But over the last 10 years or so, I think there actually have been some promising developments in that area, so there's reason to be optimistic.

A second policy is to encourage participation. The earned income tax credit can draw people into the workforce and should be made more generous as a way to increase the employment rate, as a way to get more people involved in the economy. And then something Bill brought up earlier, making the labor market more competitive by removing anti-competitive barriers and by clamping down on the anticompetitive practices I think is critically important to helping workers, particularly lower wage workers, participate more fully in economic life and command higher wages in the labor market.

HEATHER LONG: Thanks. Bill, we've got about minutes. Bring us home here on what you think or that should be the top of policymakers agenda.

WILLIAM SPRIGGS: I think the Fed has to constantly remind itself that it has a brake pedal, it does not have an accelerator pedal. And in the environment that we're in now, they need to really, really remind themselves of that. 30% of the inflation rate now is because we cannot get enough chips to restore American automobile manufacturing anywhere close to where it was pre-pandemic.

When we had a strike with General Motors a couple of years back, US auto production dipped for two months to about 80% of its previous capacity. Right now, we are at 40% below where we are pre-pandemic. We were as low as 60% in February of last year. This is the longest period we have had such low auto production. Nothing the Fed does can help that.

In fact, what the Fed is doing now will make it worse. Because what the auto manufacturers are doing is desperately trying to get chips. And they cost more money for them, because they're not from the suppliers that they were used to. And these aren't the most efficient suppliers, and they're trying to build a better, more diverse supply chain. We need them to develop.

There is a real correlation between the Fed deciding post-1980 that inflation was the worst thing that ever happened to a low-wage worker, and we maintained unemployment rates that were significantly higher than the pre-1980 level. There's that high correlation to the rise in inequality. It's not just a correlation, though.

And so the Fed needs to remember that if-- as Black America endured the entire 1980s with a double digit unemployment rate every single month because the Fed had convinced itself that the unemployment rate can't fall below 5% because this is really bad for the economy. We're going to fall off the Earth. Until finally in the late 1990s, the Fed decided, well, maybe that's not true. And sure enough, we got to the end of the 1990s, and we found the unemployment rate can go below 5% and the Earth doesn't end.

And so finally, Black America went from double digit levels of unemployment. To say that people are better off living in a permanent recession makes them better off because, my goodness, you're better off in a permanent recession living for a decade and a half at double digit unemployment, and that my goodness, if you ever got to 6%, you wouldn't like it. I'm sorry. I'm sorry to tell you, people actually liked it when the unemployment rate became closer to what the rest of America sometimes experiences during a normal recession.

And the economy is made better off when people with associate degrees get unemployment rates that look like high school graduates. When people with college degrees actually have unemployment rates that are low, it is a better economy. And understanding what those disparities mean in terms of the labor market efficiency and destroying the efficiency of the market.

When you flood people with unemployment, it hurts investments in training, because firms don't want to train workers if they're going to turn around and get unemployed. It hurts investments from workers themselves, because they experience this unemployment and get kicked out of the labor force. There are ripple effects that the Fed is not fully incorporated in the cause of high unemployment.

And I'm quite convinced they're going to get this wrong, and they're going to find out that because we have a much more porous unemployment insurance system, we have a real problem with fiscal policy that they are risking very high unemployment that they cannot solve for inflation that they also cannot solve, because they can't get chips into auto factories.

HEATHER LONG: Well, I have to be the annoying person who has to put the brakes on this great discussion. But we've brought up so much good material and ways to think about inclusive full employment and what the Fed needs to do and what other parts of government and other parts of society need to do. A huge thanks to Wendy Edelberg from the Brookings Institution, Michael Strain from the American Enterprise Institute, and William Spriggs from Howard University and the AFL-CIO. Follow them on Twitter, and keep an eye on their great research. Thank you three.

And now It's my privilege-- we've been talking to economic thinkers who have given us a lot to think about. Now we are going to turn the discussion to policymakers. I am pleased to welcome today, Charlie Evans, the president of the Federal Reserve Bank of Chicago, and Raphael Bostic, president of the Federal Reserve bank of Atlanta, to give us their perspectives on how do they think through all of these different issues and then have the very hard job of having to make the call at the end of the day of what levers to pull and how to assess these different parts of the economy. Welcome to you both.

RAPHAEL BOSTIC: Hi, Heather. Good to see you.

HEATHER LONG: You, too, Rafael. Charlie, let's start with you with the key question of today that we've all been debating and thinking about. We'll hear from Charlie first, and then Rafael. Charlie, how do you define inclusive full employment? What would your definition be? And how do you see what the Fed can really do to help achieve it here?

CHARLIE EVANS: Well, thanks, Heather. This has been a really fascinating commentary here. It's clearly very important for the Fed to understand the structure of the economy and for labor markets, in order for us to find the proper setting for monetary policy so that we can average 2% inflation over time and also promote full and inclusive employment.

I think the presentation by Bhash Mazumdar, the commentary by Bill Spriggs, Wendy Edelberg, and Michael Strain, it's clear everybody agreed that there are impediments in the labor market that are preventing some under-advantaged groups from full participation, full opportunity.

And I thought Bill Spriggs comment was very powerful, when he said many concepts of maximum employment just include, just allow accepting these impediments to be a part of how we should benchmark that. We need to understand how this affects how we should set monetary policy.

I think our previous framework, we struggled, in my opinion, to implement what we meant by symmetric inflation pressures. And we had low inflation, below 2%, for a very long period of time. I thought that there often was too much concern about inflation all of a sudden rising above 2%. And so preempting inflation sometimes took place, and it limited how strong the labor market could be for a variety of disadvantaged groups. So understanding how to characterize this is very important.

I don't focus so much-- it's very important to have a measure of what you think full employment, maximum employment, optimal maximum employment, and all that. In our framework, I really focused a lot on we want to eliminate employment shortfalls. And if we eliminate employment shortfalls, I don't believe unemployment is necessarily too low. At that point, you always pay attention to inflation. But if inflation is too low at that time, then a vibrant labor market is very important.

Now the current period that we're facing, with supply shocks and everything occurring makes it very difficult. And that's why you do have the trade offs that you talked about. But I really think that the positioning that our current framework allowed us to push as far as we could, and then things became overcome by events, by COVID, and chip shortages, and lots of things. We could talk more about that, and I know that Rafael has thoughts there, too.

HEATHER LONG: Yeah. Raphael, jump in on kind of how you see this inclusive full employment and what the Fed needs to do with this new framework implementation.

RAPHAEL BOSTIC: I'm happy to do that. But before I answer that question, I just wanted to thank the Chicago Fed for inviting me. I also wanted to thank the Chicago Fed for setting up this Economic Mobility Project and having this event.

When we think about economic mobility, the one fact or reality that hasn't really been highlighted as much today in the aggregate is that a lack of mobility, the lack of mobility that we have today, is actually costing all of us. There have been a bunch of studies that have been done. I would cite one by the JP Morgan Chase foundation, as well as research by colleagues at the San Francisco Fed, that suggests that US output would be somewhere between $2.3 and $2.6 trillion more if we had less inequality. If we had more mobility in the people being able to really achieve where they are. So this is a very important topic, and it's one that we at the Fed really have to pay an amount of attention to.

Now in terms of the specific question about how do I think about inclusive economic development. Now the way I think about it is we will be achieving this if we're in a situation where everyone who wants to work is able to find work that is commensurate with their full potential. Because then we are getting people-- really, Bill was talking about this-- people with degrees not getting paid to the productivity of that degree or not in roles that are consistent with the productivity of that degree. That's where we see constraints.

And if we can achieve that, 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 that we're not seeing it happen right now. The other thing that I would say on that is that I think my definition-- in the panel, there was some back and forth about are we talking about full employment? Are we talking about maximum employment? What are time frames?

To me, I think my definition kind of is an umbrella for all of those things. And I think everyone-- well, I hope everyone can see their definition of their role in terms of the definition that I would put forward. I would also say I really appreciated Bhash Mazumdar's presentation to open, and I was very happy that he showed Raj Chetty's map, where he showed where mobility was lowest and highest across the United States.

And I hope that everyone who was watching noticed that where it was lowest is exactly in the places that are my district. So if we think about the Southeast, I represent and our Reserve Bank represents much of the area in this country where mobility is incredibly low. And it's one of the reasons why we've highlighted economic mobility and resilience and trying to increase it as a strategic priority for us, because that's so important for so many communities throughout our district. So this is really-- I wish we had thought about putting up the Economic Mobility Project ourselves. But Charlie, we'll be happy to work with you and your team as much as possible.

Now in terms of monetary policy, I would say two things. So one, I think the goal here is to try to have sustaining growth that occurs over an extended and as long a period as possible. And what we've seen through our experience is that longer economic expansions allow groups that have not historically participated in the marketplace to participate more. You highlighted in the first session, all the speakers spoke to labor force participation, employment to population ratios.

And we know that those numbers are higher across the board when the expansion lasts longer. But there's a bet. And there's always economists on the one hand. On the other hand, if you push it too hard, there's a chance that you will have to create some sharp reductions in economic activity.

So the second principle that I think we need to have is to make sure that we are trying to minimize the volatility or the variation of experiences over time for people. So people are not getting in the jobs and then being thrown out of jobs, not getting back into it. Because I think we've also seen that is tremendously disruptive.

And that really turns to us thinking about that dual mandate, and it brings in the notion that in some instances, when employment runs long, the economy can get too hot. You can start to see upward pressure on prices that then can induce that volatility. So we've got to be trying to do a balancing act here. And I know you're aware of this.

I hope that many of those of you who are watching are following all of our Twitter feeds and things. Because you'll know that our bank, the phrase that we're using is observe and adapt. Because to walk that fine line, to really hit the mark at the right time in the right volume, requires us to have a clear sensibility and a clear understanding about the dynamics that are prevailing at any moment so that we can understand the dynamics of our policies.

And in today's environment, we've got all the structural issues that were talked about earlier. We've still got a lot of COVID issues that remain. We have the war in the Ukraine and the conflicts in other places that you noted. There's a lot of moving parts that are going on that we're just going to have to monitor if we want to hit this right.

HEATHER LONG: Charlie, I'm curious to get your take on the current environment. Would you say that we're at full employment, or at least as close as you can get if there weren't COVID and the supply chain issues that we're mentioning?

CHARLIE EVANS: Well, I mean, clearly, the unemployment rate is low at 3.6%. I think labor force participation could be higher. We have still many people who haven't come back into the workforce. And so I think that's important. I think it's critical. In fact, I mean, we are at a moment where year after year, we've got the aging of the population. We've got the demographic challenge during the slow recovery after the great financial crisis. Maybe we didn't need to worry about that so much, because we didn't have strong enough aggregate demand.

But now, in an environment where we need all the workers that we can get to show up, it becomes a challenge. And so now if you look back and take stock of the fact that you've got the aging of the population and skills haven't kept up with the change in technology, right? We've also learned from all of the remote work at home, if you were in a privileged situation where you're doing professional services, back office work, you can work at home. You don't have to be on site, up close with people, like essential workers in the Fed, then you can take advantage of technology. Keeping up with those skill sets is going to be an important part of that.

So I struggled with the comment. I guess I hadn't quite internalized the comment that perhaps the labor market is unhealthy now. I think I agree with the way Bill Spriggs characterized this. We've got a lot of people who have opportunities. We have people in minimum wage jobs, fast food and other places, that have more opportunities to switch. We've got a lot of job switching.

I think we're seeing a lot of resorting at all skill levels, where it could easily be the case where in our own bank, it's like people have wanted to work remotely. And maybe we kind of said, well, yeah, but you just can't do that. We don't have the technology. We have demonstrated that the technology exists. You can't go back and say, we don't how to do it. We did it. So now I think you're going to get a resorting where some recruits are saying, I want a remote job. Well, that's not what this is. So they cross you off the list. Resorting, that's going to look painful.

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. If you used to schedule workers and then when enough people didn't show up that day in your store, you sent them home. It's harder to implement that business model, and it's going to be more pricey.

So there's a lot going on. I don't necessarily see it as unhealthy. I do say it's a big challenge for businesses. And businesses have seen strong earnings. And I think that they've worked hard and they're finding ways to make that work. So I think we just need to continue working the situation.

HEATHER LONG: And I guess how do you strike that balance, Charlie, going forward of obviously, you all have made the decision that you need to address-- raise interest rates to some degree this year to address inflation. What makes you confident that you won't have bad spillovers on the labor market, that we won't see job losses as those interest rates rise?

CHARLIE EVANS: So I think we're in the middle of adjusting monetary policy from our very accommodative stance after COVID towards a neutral setting by the end of the year, probably certainly early next year, depending on what the pace will be. And if you are of the view that the current inflation pressures are from accommodative policy, strong fiscal policy, then you're probably going to be expecting that we need to restrict aggregate demand. And I think that would put pressure on jobs.

I'm of the opinion that a lot of what we've seen-- surely a lot of what we've seen are supply chain issues and that those are going to come off the boil. It's still going to take longer than I thought initially with the chip shortages and all kinds of things. But I think that once those come down-- used car prices, just think about it. They went up 40%. If they come down 5%, that's very helpful for any inflation calculation.

So 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. But there's a lot to be monitoring still.

HEATHER LONG: Yeah. You know, Rafael, you stressed a number of great points. And one of them was the delicate trade off that you and your colleagues face every day as you're thinking about this. I'd say one of the biggest criticisms that I'm hearing of the new framework is that some people think it was too tilted towards focusing on the labor market and that that's maybe why some Fed leaders missed the inflation rise that has been happening in the last few months.

I know you both know the former head of the central bank of India, Raghuram Rajan. He recently called it that you all were like prisoners of this new framework. So I'm curious for you to respond a little bit to that. Do you think this framework at all caused the Fed to be a little bit behind in this environment? Or would you push back at that sort of prisoner characterization from our friend?

RAPHAEL BOSTIC: Yeah. I guess for me I don't think that the framework really informed or animated how we approached policy through much of last year. I think people do need to keep in mind that we're still in the pandemic. And as we were going through last year, much of the time in last year, the aggregate numbers were not screaming that things were about to pivot to an extreme outcome.

I will also say that among our set of colleagues, there were differences of opinion as to how rapidly the economy was going to come back. And Heather, you've reported on this many times. There was a lot of uncertainty around what was going to happen and how fast were we going to see jobs come back and how fast was inflation-- or was inflation going to respond at all.

So I actually don't think that that's right. For me, I will just say it's time that we get off of our emergency stance. I think it's fully appropriate that we move our policy closer to a neutral position. But I think we need to do it in a measured way and make sure that all the other uncertainties-- all the churn that's happening because of the war in Ukraine, because families are starting to understand how they're going to address their child care needs. As retirees start to think about, well, did I retire too early? Or should I come back, because wages are starting to be much more attractive in a much more dynamic labor market?

We're going to learn a lot as we go through this year. And I would also just say with the fading-- with the reduction and the calming of the fiscal stimulus and that waning over time that's also going to lead to a pullback in aggregate demand in ways that should allow the demand and the supply responses to start to come closer to each other.

Where we are now, we have an imbalance between demand and supply. And we've got to find and monitor to make sure that we understand how both the demand and the supply sides are working. I think our movements and the waning of fiscal policy will get us to see demand start to come down.

And I think resolution and decisions by workers, as well as resolution of some of the supply chain issues, will allow the demand to come up-- will allow the supply to come up in ways that they kind of meet in the middle, and we get back to a more normalized level of inflation.

HEATHER LONG: Yeah. We're all hoping you succeed, that's for sure. Charlie, obviously, you all at the Chicago Fed, you have this amazing Economic Mobility Project that you've launched. I know you personally go around and meet with a lot of different groups of workers to try to better understand the pulse of what's going on.

What more do you think in kind of a medium or longer term role the Fed and monetary policy needs to play to try to get to a more inclusive and broad-based full employment? Obviously, there's many structural issues. But what do you really think the Fed specifically can do here that it's not already doing?

CHARLIE EVANS: Thanks. Like all of my colleagues, we go around our districts and we talked to stakeholders, business people, people in communities, people who are facing challenges. And economic mobility is definitely a really important one. I mean, we see-- in over the last 20 or more years, we've seen very large increases in income inequality. Opportunity, I think, is extremely important.

The educational support. Just looking at Bhash Mazumdar's key factors explaining the geographic variation. Better primary schools are obviously very important. The skill set. Michael Strine mentioned that. There needs to be more support-- Michael Strain, sorry-- K through 12. And I just think that that's very important, keeping our finger on the pulse of what's taking place.

I mean, at some level we do have to be modest and remember, being the Federal Reserve, we've got one instrument, and it's a short-term policy rates. It's the setting of monetary policy. And we can only do so much in terms of getting the economy towards maximum employment. We want to promote maximum employment, inclusive employment, with opportunity for everyone.

In my mind, it becomes very important that we not pull the trigger too early to worry about risks that maybe we don't have enough evidence, like higher inflation when inflation was 1 and 1/2%. Letting the economy continue to run, but paying attention to inflation. Because that's our dual mandate, so we have to be very careful.

But I think that a lot of the commentary about oh, the Fed is trapped by not being able to be preemptive against inflation. Instead, they were waiting for inflation to pick up. Well, up until very recently, that is what we were facing for the last 14 years that I've been president. I think if you look at the February 2022 CPI report, you saw, top line, 7.9% CPI. Right next to it was the column, February, 2021, top line CPI, 1.7%. Core, 1.3%.

It's very quick that we saw differences in the inflation experience. And so I think that we're trying to be careful. You just don't want to preempt the best possible labor market that we can achieve until you're very confident and you're looking at the appropriate trade offs.

HEATHER LONG: Let me just follow up real quick. Obviously, most of us are focused mainly on the monetary policy side and the levers you can pull or not pull there. But you all also do a lot of bank regulation and overseeing of regulatory side. And obviously, there's been a lot of issues over the years with redlining and not giving those types of loans to certain types of borrowers. Do you see, Charlie, any more need to do, maybe from your other toolkit, where the Fed could be more involved?

CHARLIE EVANS: Well, I think we have to follow through on our requirements with our authorities with bank supervision with the Community Reinvestment Act, making sure that there's fair access to credit, fair lending, and all of those features. And so making sure that consumer compliance is up to what it's supposed to be.

I think banks want to do the best for their customers, and they want to be making loans to everybody. But making sure everybody has access to that lending. We had a very nice series, the Fed series, Racism in the Economy, where we heard on the credit side that the PPP loans, the banks didn't necessarily-- there were minority businesses that found it more difficult to find their place in the queue. They were in the back. And that was a challenge.

So I think making sure that everybody has the opportunity that they should be afforded is really very important. And we have a responsibility there. All the bank supervisors do. That's part of the regulatory environment.

HEATHER LONG: Rafael, you sort of touched on this earlier in your opening remarks, but I wanted to circle back to it. One of the other criticisms you sometimes hear when people look at the new framework or look at what the Fed does now is you hear some people say, mission creep, that the Fed is trying to do too much, and that by taking a larger role in trying to make a more equal economy or to eliminate some of these inequalities in the economy, that that's going beyond the remit that Congress gave to the Fed. I know you have thought deeply about this. How would you respond to those critics who see some of this economic mobility work and inclusive economy work as mission creep?

RAPHAEL BOSTIC: So I would say a couple of things on this. At a very high level, I think in order to really understand what the implications of our policy are going to be for the macro economy, we actually have to have a deep understanding of the micro economy. Because the macro is an aggregation of all of those things.

And a lot of what we do is really try to understand where the market is, how it works, and understand ways that it might work better. Because if it works better, than our policies will be more effective. And as I said before, our economy will be more resilient. It'll be more productive, and it will move ahead further.

So as I go around and look and talk to business leaders and talk to communities and see how individuals are managing through the economy, to the extent that I see areas where there are challenges, where people are not getting full opportunity to access their full potential, I want to make sure that our policymakers are aware of those things so that they can then decide what steps are appropriate to move forward.

I think for us, one of the things that-- one of the ways that I think we are most effective is that we see a lot on the ground all the time, and we want to pass that on as much as possible to give people a sense of how the economy is working and where there are opportunities for us to do better. And as I said, I think that makes our policies more effective.

And it actually allows us collectively to not have to rely on the Fed's policies so much in order to get good outcomes. So I think that these things are part and parcel of everything that we do. The other important thing, I would say-- and this has been a hallmark through this entire session today-- is that these are economic outcomes.

These are things that really do have direct connections and linkages to the US economy and how it performs. And ultimately, that's the benchmark by which we get judged. We get judged in terms of employment and how the economy responds to demand in the revelation of prices, and ultimately in terms of GDP growth and output.

And I hope that-- a phrase we use a lot in our bank is people positive. Our goal 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.

And so understanding ways that we can reduce that imbalance, both today, but also by taking steps through other policy makers to make it less likely that those imbalances will arise in the future, I think that makes us all better off. And I think that allows us to more fully achieve our mandate as we move forward.

So I hear the criticisms, and I take them on board to make sure and check myself to make sure that the things that we're doing are being done all in the service of our dual mandate of maximum employment and stable prices. I think there's a pretty good case to be made that we are achieving that.

HEATHER LONG: Yeah. Charlie, I want to give you the last word here. And obviously, we're sitting here two years after a huge crisis hit the world with the pandemic and the COVID, and it turned into one of the most unequal recessions of modern US history. What would you say that you personally learned during these past two years about inequalities in the economy that maybe you didn't know before or that you didn't know as deeply as before?

CHARLIE EVANS: Well, thanks, Heather. And thanks to my colleague Raphael Bostic for just a terrific panel, and everyone here. This has been a very challenging time since March of 2020. I like to think that I've learned how hard everyone has worked and how resilient they've tried to be in the face of just unbelievable anguish and unfair consequences, horrible health outcomes from COVID.

And I've observed that there's a tremendous amount of unfairness in this. For those of us who could do our jobs remotely, digitally, we could go home. Maybe my biggest challenge was worrying that a dog was barking somewhere in the house. Whereas essential service workers had to come down, keep the cash services going and taking care of that. And so that exposed them to risk.

People were very resilient. They really worked hard in all of that. And it's just been a tremendous honor to be a part of this. You mentioned mission creep, and that sort of brings me to this unfairness, which is part of why I think this Economic Mobility Initiative is really so important. And the work that we've seen already from Bhash Mazumdar.

I'm a macro economist, and when I hear Raphael say, GDP's pretty good, and I go, yeah, it is. And then I kind of go, but GDP is this average concept, and we kind of tend to think that averages are good enough. But then I stop, and I see more things, like median household income for a family of four, $67,000. That's 50th percentile. Mean, average household income, family of four. $97,000. That's the 65th percentile.

We've focused. We've creeped. We've had income creep focus into the 65th percentile. And I just have to ask myself and others, why don't we symmetrically worry about the 35th percentile? Why don't we do a little more median macroeconomics, if you will? This is the microstructure that Rafael was talking about that's so important for us to really appreciate and understand.

And I think that through the initiatives like this, where we're focused on everyone having opportunity, being inclusive in our economy, enjoying the benefits, that's an important part of what every policy maker-- whether it's monetary policy or up on the hill or in your local, state and local government really cares about.

And I'm really excited to be part of it. And I want to thank everybody for helping us out so much on this terrific inaugural event.

HEATHER LONG: Yeah. Thank you both. Obviously, the three of us could talk for hours about these issues. There's so much more to say. Both the Chicago Fed and the Atlanta Fed have done great research in this area and continue to do so. I encourage people to check it out. Raphael Bostic, president of the Atlanta Fed, Charlie Evans president of the Chicago Fed, thank you both for your comments and thoughts today.

And now I have the very great privilege of turning it over to the amazing Kristen Broady, the director of the Chicago Fed's Economic Mobility Project, to bring us home.

KRISTEN BROADY: Thank you, Heather. That was an amazing panel. And thank all of you for joining the Federal Reserve Bank of Chicago's Economic Mobility Project for our inaugural event. We'll be sending out a post-event survey, so please be on the lookout for it. We value your feedback. A recording of the event and a summary will be available on our website at ChicagoFed.org/mobility in the next few days.

On our website, you can also learn more about the Economic Mobility Project team and the policy research from Chicago Fed economists. We hope that you will join us for our next virtual event, which we will host during the week of Juneteenth, where we'll focus on the determinants of the racial wealth gap and policy solutions that can help mitigate it. Again, thank you all for joining us, and have a great rest of your day.

At the conclusion of today's event, you'll hear from Kristen about some of our future plans. But first, let me say a little bit about today's event. As you might know, the Fed spent much of 2019 and early 2020 developing a new framework for its long-run monetary policy strategy. This involved a lot of technical economic analysis, but we also held meetings all across the country and met with a wide range of organizations to hear how monetary policy affects people's daily lives.

The result was the FOMC's August 2020 Framework Statement, which included several notable changes from the previous framework, including one that we want to focus on today, which was the FOMC declared that its maximum employment mandate is broad and inclusive.

To better understand what that focus on inclusivity should mean for the actual conduct of monetary policy, we have three distinguished economists here today to offer their thoughts. After that, we'll hear from President Raphael Bostic of the Atlanta Fed and our own Chicago Fed President Charlie Evans.

But first, to set the stage and highlight the importance of research supporting greater economic mobility and inclusion, Bhash Mazumdar is going to give us an overview of his and others' research on the topic of intergenerational economic mobility. For more than 20 years, he and other researchers have been using increasingly better data and stronger research designs to understand the important question of how much a child's economic success is tied to that of their parents. Bhash.

BHASH MAZUMDAR: Hey, great. Thank you, Dan. [INAUDIBLE] share my slides. OK. So thank you, Dan. I'm very pleased to be here today to talk to you about some of my research and that of others on the topic of intergenerational economic mobility.

So my goal in this presentation is to basically share with you some high-level facts and insights about economic mobility that we've learned over the past few decades that hopefully will give us some important background information about the state of opportunity and mobility in the US.

I want to start by describing what the consensus view of intergenerational economic mobility was just a few decades ago and described how it's changed as we've gotten access to better data and used improved research methods. So I would say until the 1990s, much of the research suggested that the quote, unquote, American dream was alive and well, that there was ample opportunity to move across the income distribution, regardless of where your parents started.

However, that research was done using intergenerational data sets that typically contained just a single year of income for measuring the income of parents and kids and often used unrepresentative samples. For example, a sample of just one single state. So based on this kind of data and methodology, researchers estimated the statistical association between parent income and child income and found a relatively low estimate of 0.2.

So what does this mean? In practice, this means that roughly 20% of the income gaps between, say, any two families would remain a generation later on average but that a full 80% of those gaps would dissipate within a generation. So you can imagine that once you play this out over another generation or two, income gaps would pretty much disappear. And that's what led the economists Gary Becker and Nigel Tomes to write in a 1986 paper that I put out on the slide here that almost all earnings advantages or disadvantages of ancestors would be wiped out within three generations.

So this old view of mobility began to change with newer studies in the 1990s and 2000s. So for example, with better data-- that is panel data. So this is data that's collected year after year for the same families-- we could now get a much better read on the true long-term economic status of both parents and children. And what's important is that this reduces the noise in the data and allows us to get much more accurate assessments about the state of mobility.

This slide highlights a 2005 paper of mine that was part of my PhD dissertation some time ago, and I basically found that once you used a very long time stream of income to capture the longer-term economic status of parents and kids-- so I used up to 16 years of data using high-quality administrative data from Social Security earnings records-- I now found that estimate of the association was greater than 0.5. So much higher than the 0.2 that led to Gary Becker and Nigel Tomes conclusion.

And so I did an exercise-- and I show this example on the slide-- that if you took a typical family living in poverty, that it would take on average five generations before their descendants would approach the national average income level. So based on this kind of estimate, I concluded that 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.

We still might want to know, however, how does the US fare compared to other countries and particularly to other advanced economies. So as more data became available in other countries, we had studies like this take place throughout the world, and we got a clearer picture by the mid-2000s. So the chart on this slide is taken from a paper by the economist Miles Corak, and it shows what's called the Great Gatsby curve. So this is a name that was coined by the late economist Alan Krueger, who was the head of the Council of Economic Advisors under President Obama.

And this chart basically shows the relationship between inequality, which runs along the x-axis in this figure, and intergenerational income persistence, kind of that association measure I talked about, on the y-axis. So as that number goes up, mobility goes down. So there's this negative relationship. As you have higher inequality, you have less mobility.

And as you can see from where the US is on this chart, it's not at a particularly great spot. We have both high inequality and lower mobility, particularly when you compare us to most other advanced economies. So for example, you can see the Nordic countries grouped together in the lower left part of this figure. And even economies such as Japan and Germany both have lower inequality and significantly more intergenerational mobility than we do.

I next want to turn to thinking about differences in intergenerational mobility by race within the US. So this figure is taken from a paper of mine published in 2014 where I created estimates of both upward mobility and downward mobility for both white and Black families.

For upward mobility, I basically calculated how likely it would be for a child whose parents were in the bottom quintile-- that's the bottom 20% of the income distribution-- to move out of that bottom 20% as an adult. And similarly, I calculated how likely it would be for a family that-- for a child from a family that started in the top quintile-- the top 20%-- to move down, to get a measure of downward mobility.

And as you can see, the results in this figure are pretty striking. For Black families, children were about 24 percentage points less likely to move out of the bottom quintile as adults. And Black families were also 14% more likely to move out of the top quintile than white families.

When we think about the implications of this sort of double whammy of Black families being disadvantaged both at the bottom and the top, it's pretty critical for thinking about how we might expect the racial inequality to evolve going forward. So in this paper, I did an exercise where I made the assumption that these dynamics of low upward mobility and high downward mobility for Black families would continue into the future generations, just to see what that would imply. And that exercise basically showed that under those assumptions, Black families would remain perpetually disadvantaged.

However, I think there are important reasons to think that this does not have to be the case and doesn't have to be our future. It's a function of the policies that we choose going forward. And there are lots of studies of previous policies in the realms of education, health, and labor market that suggests that policy can profoundly change this forecast.

I now want to transition to a different aspect of thinking about intergenerational mobility, and that's how it varies by geographic location. It turns out there are also important differences based on where children are raised in the US. The map on this slide is taken from a somewhat famous recent paper by Raj Chetty, Nathan Hendren, Pat Klein, and Emmanuel Saez, and they use population-wide administrative tax records for the US to show that there's quite a bit of variation in intergenerational mobility depending on where you grew up.

So for example, a child who was born in poverty who grew up in the 1980s and 1990s in, say, Boulder, Colorado, could expect to get close to the median level of income by the time they were adults. But a similar kid who grew up in Cincinnati, Ohio, would move up a bit, but would still be around the 35th percentile-- 38th percentile as an adult. And the color coding on this map basically shows you the darker areas are areas with less mobility. And so you can see, there's quite a bit of geographic spread.

The authors also highlight five of the most important factors that they found can account for this variation in mobility. And so the areas with high mobility tend to have less residential income and racial segregation. They tend to have lower levels of income inequality. They have better K through 12 schools. Higher levels of social capital. By that, we mean measures of the quality of social networks in the community and the community capital levels. And finally, they have greater levels of family stability. For example, lower levels of the fraction of families that are headed by a single parent.

The final aspect of mobility I want to talk about is time trends. So as I showed earlier, the Great Gatsby curve showed that there was this negative relationship between inequality and intergenerational mobility. And given the fact that we saw inequality in the US begin to rise pretty sharply after 1980, we might have expected that intergenerational mobility began to fall. And several studies appear to show evidence consistent with this pattern, including several of my own studies.

The figure in this slide is from one of my papers, and the blue line basically shows that there was an important increase in intergenerational persistence starting around 1980, again suggesting a decline in mobility after 1980. And this corresponds to a sharp increase in the payoff to getting more education, particularly to getting a college degree, as shown in the red line in this figure.

So more carefully understand the causes for this decline in mobility around 1980. In a recent paper with my co-author John Davis, we show that there are two important factors. One is that there's the rising payoff to more schooling, as I alluded to. And we found that could explain about 20% of this decline. We also found a pretty striking four-fold increase in the association between the likelihood of getting married and one's parents' income, and that could also account for about 40% of the decline in intergenerational mobility and family income that we see.

So to summarize, I think the research over the last few decades has pretty dramatically changed our view about intergenerational income mobility in the US. There's now a pretty clear consensus that the US has relatively low mobility when compared to other advanced economies. And it also appears that mobility declined around 1980, when we saw an increase in inequality by many measures.

Finally, there are important differences in mobility by both race and location. And I would say the most salient finding is that Black American families are doubly disadvantaged. They experience both low upward mobility from the bottom and high downward mobility from the top. Hopefully this provides an important set of basic facts that should inform our understanding of the state of opportunity in America. Thank you very much.

DAN SULLIVAN: Thank you, Bhash. That was very helpful, if a bit sobering. Bhash didn't mention it, but one thing I find fascinating is that the association he finds for the lifetime incomes of children with that of their parents is pretty close to the association of children's height with that of their parents. So there's just a lot of persistence in the level of families' income over time.

Economic mobility just isn't as great as one might hope. However, as Bhash mentioned, that doesn't mean that has to be the case in the future, that there are policies that might be able to improve things. And our Economic Mobility Project will be looking at research related to such policies in the coming years.

Now let me turn things over to Heather Long to moderate our next two sessions. Heather is a columnist and a member of the editorial board at "The Washington Post." Over her career, she has covered the Fed and numerous other economic issues. Recently, she's written extensively on labor market developments in the wake of the pandemic. Heather.

HEATHER LONG: Thank you, Dan. As Dan said earlier, the Federal Reserve went through nearly a two year process to review its goals and its core framework, and it met with everybody from business leaders and economists to labor leaders and educators and more to really think through how should the Fed define its two key goals?

And what they came up with in the end of the summer of 2020 was that full employment should continue to be a goal, but full employment should be, quote, broad-based and inclusive. And then inflation-- the other key goal, keeping prices relatively stable-- should average around 2% over the long term.

Obviously, 2020 was a heck of a year to implement and roll out a new framework, and it's certainly being tested right away in this current environment, this very unusual recovery we're in that's been very fast. We have unemployment almost back to pre-crisis levels. At the same time, the labor force participation rate remains lower than it was pre-crisis, meaning we have fewer workers in the economy today than we did in early 2020. And of course, at the same time, we have high inflation, at a 40-year high.

So to try to make sense of this new framework and how the Fed should be implementing and thinking about it in the environment we're in now, I'm thrilled to be joined by three top economic thinkers. That's Wendy Edelberg, the director of the Hamilton Project at the Brookings Institute, William Spriggs, an economics professor at Howard University and the chief economist at the AFL-CIO, and Michael Strain, the director of economic policy studies at the American Enterprise Institute. Welcome to you three.

WILLIAM SPRIGGS: Thank you.

HEATHER LONG: So let's kick it off with the big question here. I'd like to hear from each of you. Why don't we go maybe Wendy, Michael, and then Bill. How do you each define inclusive full employment? What does that actually look like in practice? And how should the Fed think about implementing that goal? Wendy, why don't we start with you.

WENDY EDELBERG: Sure. So employment to population ratios-- for example, something that incorporates both labor force participation and the unemployment rate. We can compare employment population ratios to other periods to give us a sense of how strong the labor market is relative to its full employment level in light of structural factors.

What I mean by full employment is what the labor market can sustain without problematic shortages or problematic wage pressure. And I want to break down to three parts of that and draw a distinction between full employment and what I would call maximum optimal employment.

So first, history may not represent full employment. The labor market, particularly for some groups, may have been below its potential during whatever our comparison period is. So for example, the employment to population ratio for prime age women was at a relatively high level right before the pandemic. But that level was not at its highest. That had been reached in 2000. So was the employment to population ratio for prime age women at its potential right before the pandemic? It's hard to know.

Second, the factors influencing full employment outcomes can change over time. The employment to population ratio is over a percentage point below its pre-pandemic level. But the pandemic seems to be holding back the labor market's potential. It's lowering labor force participation among some groups, and that's really a structural factor, which brings me to my third point.

The labor market is strongly affected by structural factors. An obvious example of this is the increase in women's labor force participation that occurred over decades. That increase wasn't driven by greater aggregate demand leading to greater labor demand that pulled women in. The increase was driven by structural factors that in essence lowered the cost and increased the return to women working. So 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.

Fed policy can clearly influence aggregate demand and thus labor demand. And a strong labor market can definitely help to break down structural factors. We saw this in 2018 and 2019. That gave us good evidence that when the unemployment rate for Black workers fell to a historical low, it did that partly because aggregate demand and labor demand was so strong. But the Fed can't do all the work to truly get the economy back to maximum optimal employment.

Work I did with Stephanie Aaronson and Mitchell Barnes that leveraged work Stephanie had previously done with other co-authors shows that even though strong labor markets are associated with significant reductions in racial and ethnic disparities and unemployment rates, by itself, a strong labor market is highly unlikely to eliminate the racial and ethnic unemployment rate gaps that have been remarkably persistent over decades.

A hot labor market shrinks disparities, but it doesn't eliminate them. And unfortunately, the disparities just widen again when the economy cools. So creating true equality of opportunity will require structural changes to our institutions, our policies, our attitudes. And for that, we need fiscal policy. And I've lost you all.

HEATHER LONG: I don't think so. Michael, are you able to jump in?

MICHAEL STRAIN: I am to jump in. I agree with a lot of that. So let me perhaps stress some different points. Heather, you asked how do we think about full employment in a practical sense. The first answer that came to mind is a situation where businesses are chasing workers, where workers aren't chasing businesses. And a situation where businesses are chasing workers, you're not going to get a better jobs program than that.

I think Wendy, of course, is correct about a really hot cyclical period of the labor market eroding some structural obstacles. Wendy mentioned the shrinkage of some race gaps in the years leading up to the pandemic. I think it's important to note it wasn't just race gaps that shrunk.

You saw employment rates for workers with disabilities increase considerably in the years prior to the onset of the pandemic. You saw businesses changing their attitudes toward hiring workers who had been formerly incarcerated. Businesses much more willing to hire higher workers with criminal records.

You saw businesses change their hiring practices around other sorts of policies, of hiring policies, that may have a disparate impact on lower-income Americans and minorities. Wendy's right to distinguish between these cyclical and structural factors, of course. But you can make some progress on structural factors, as Wendy said, by accurately understanding the cycle.

I think full employment should be considered over a longer time horizon than just a few months. I don't think that 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.

The Fed would not be helping those workers by running the economy really hot, creating some opportunities for them, but then seeing the economy collapse under the weight of overheating or the economy shrink as a consequence of the Fed having to pump the brakes too hard. So I would encourage, just as the Fed is trying to think about inflation over a longer time horizon, I would encourage the Fed to think about full employment over a longer time horizon.

And then I think similarly, when we think about full employment, we should think about sustainable full employment, for similar reasons relative to the risks to lower income households and lower wage workers from overheating.

WILLIAM SPRIGGS: Well, I think the Fed needs to concentrate on maximum employment. I think the Fed was well-served to understand that if you only look at the top line, the decomposition of the unemployment rate looking at subgroups can't yield very great insights into the problems that the labor market has.

It is true that Black workers face discrimination and that will create disparities between Black and white unemployment rates. Unfortunately, too many economists think of the Black-white unemployment rate as a skills gap. There is no significant gain, whether you look at it by education or test scores, in understanding the Black-white unemployment gap.

Instead, it's helpful to understand the structures of the labor market and how it works. And for the purpose of the Fed, this is very instructive, because workers who face those types of barriers are going to be more sensitive to whether jobs are actually being created or not, whether firms are really hiring or not hiring.

And so the result is that 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 big barometer to look at. And it's instructive, because when the labor market turns sour, Black labor force participation collapses.

The key here is that the Black to white 2-to-1 unemployment rate remain stable precisely because of the variation in Black labor force participation. So when employers are really hiring, you see the Black labor force participation respond rather quickly.

And that gives a quick insight to the Fed of something else, which is if you only look at unemployment to prices as a measure, you're going to miss the key ingredient, and that is labor force participation itself is endogenous. And therefore looking only at unemployment rates is going to give you a very misleading picture of what's the true nature of who's really available.

If you look at the current recovery that we're in, you will notice that a huge share of those who are doing the labor force flow into employment are coming from not in the labor force. 70% of the people in the last five, six months who say I found a job came from not in the labor force-- not from unemployment. And the share of those who are unemployed who are leaving the labor force-- going to not in the labor force-- has been declining.

And so the sense that, well, they won't come back, or they won't come back soon, clearly means you have to look at these other indicators. Black workers provide that canary in the coal mine. They are an obvious group that faces these barriers. But there are other groups, and the COVID crises alerted us to some of those insights. It's just not always clear, because we don't get to disaggregate our numbers well enough long enough.

So just as an example, I think many people were shocked when the Asian-American unemployment rates skyrocketed at the moment of the crisis because the unemployment rate for Asian-Americans tends to be very low. But that opened people's minds up that, unlike the stereotype that they're all engineers and doctors and whatever, a large share of Asian-Americans are in low wage service sector jobs, personal service jobs. Nail salons. Restaurants. Dry cleaners.

And that insight helps you understand that Asian-Americans have longer unemployment duration even than African-Americans typically. The long-term unemployed are highly heterogeneous, and so it's hard to understand what's driving the long-term unemployed. That heterogeneity makes it hard for us to pinpoint which of the frictions are the cause.

But this fact for Asian-Americans and the fact that their long-term unemployment duration comes from even their own bifurcation highlights that within the labor market, there are still these sticky points. The things that aren't clearing. This does not mean that we just fluff it off and say, well, other people can settle that.

It means that if you are consistently near full employment, maximum employment, you harm these very groups that are facing that disparity, and you appreciate that this is a deadweight loss. And most times in our economy, the unemployment rate for Black people who have associate degrees approximates that for whites who are high school dropouts. This is a huge deadweight loss. Who wants to run an economy in which people with associate degrees are still finding it hard to connect to a job?

When the labor market tightens, that gap does close, and then Blacks who have associate degrees have unemployment rates that look like white high school graduates. Do we say, well, that's still structural. We don't care. Or do we understand that our concept of what is maximum employment incorporates accepting these frictions or by wanting an economy that makes those frictions begin to disappear. I bring that up because not just that the gaps got smaller, but in the fall, before COVID, we have the unemployment rate of Hispanic men and white men equal.

Many people say, oh, it's always 50% higher. Hispanics just have a higher unemployment rate. There's nothing you can do about it. And if you try and do anything about it, then the dragons at the end of the earth is going to eat up the economy, and inflation is going to go through the ceiling. And everybody's going to be worse off.

It didn't happen. It didn't happen. And even when the gaps were narrowing for Black and white workers prior to COVID, we weren't experiencing accelerating inflation. So the notion that when you approach these barriers that people think are independent of how we even think of maximum employment, it really means that we're missing an opportunity to reach optimal employment for the United States.

HEATHER LONG: Thank you. Yeah, it's really fascinating. Each of you has brought up the need to really think in a numeric way about the what does inclusive employment mean as being more focused on labor force participation or employment to population ratios, as opposed to the unemployment rate. I know we in the media are guilty sometimes of putting too much emphasis on the unemployment rates, which doesn't capture the full picture.

Each of you has also really stressed these structural factors in the economy that are persistent, like discrimination, that need to be addressed both by the Fed and also outside of the Fed. So I guess let me ask Wendy-- and I've got a question for each of you. Wendy, help me understand. Are we at full employment now, in your eyes?

WENDY EDELBERG: So given the structural challenges that we have that are not all that well understood, which is to say that we know that labor force participation right now is depressed. It seems intuitive that it's because of the pandemic and it's because people are still reluctant to work in face-to-face industries. Or they're taking care of sick family members or children.

But it's actually difficult to really nail down that evidence concretely. But nonetheless, it does look like structural factors are holding down labor force participation. And given that, yes, I would say that we're roughly around full employment. So job openings have been running at 7% of total employment for the last eight months. Quits at 3%. Those are both their highest levels since we started collecting that data in 2010.

It's particularly high in the leisure and hospitality industry, where wage gains have been quite strong. So I think we have a lot of evidence that given structural factors, labor demand right now is beyond what is sustainable.

HEATHER LONG: Fascinating. Michael, I want to sort of put a different version of that question to you. At the Fed press conference in March just a few weeks ago, Fed Chair Powell actually called the labor market right now, quote, "unhealthy," that it had gotten to a point where, given what Wendy was saying, these cyclical factors almost looked out of whack. Do you agree with that? Are we at an unhealthy point?

MICHAEL STRAIN: Yes. I think we're at an unhealthy point in the sense that Wendy said, which is that we're at an unsustainable point. The Fed and monetary policy cannot make people less skittish about going to work in an in person job. Monetary policy can't stop my three-year-old from having to quarantine at home when she's exposed to somebody who has COVID-19. And monetary policy can't convince a guy who is 63 years old, who is sitting on a really healthy savings account balance, to go back to work when that person has decided to retire early.

Of course, the Fed can affect all three of those at the margin through higher wages in the labor market. But there are a lot of intermarginal people in those situations, and I think it's appropriate, as Wendy did, to think of those more as structural factors. Look at the labor market as a whole. Wages for non-supervisory workers are growing in the last print. It's 6.7%.

That's extremely rapid. I mentioned earlier how do you kind of think about full employment in a non-technical sense. If you think about full employment as a situation where businesses are chasing workers, and where workers aren't chasing businesses, it is hard to think of a better indication of the amount of competition in the labor market. It's hard to think of a better indication of the lengths that businesses are going to to attract and retain workers than looking at the really rapid wage growth we have.

Again, 7% wage growth for non-supervisory workers. In leisure and hospitality, average wages have been growing in the kind of 10%, 11%, 12%, 13% range. Businesses 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.

It risks recession either because consumer demand collapses under the weight of high prices and business investment spending collapses under the weight of higher producer prices or because the Fed, in an effort to slow the economy but not throw it into reverse, makes a mistake and accidentally causes a recession.

And when we have a downturn, again, the workers who are the most sensitive to the business cycle are lower wage workers and workers in low income households. And so that's the sense in which I think the current situation in the labor market is unhealthy. The sense is that it is not sustainable.

HEATHER LONG: Bill, I'm curious to get your take on what you're hearing from Wendy and Michael and this sort of mantra that's happening from the markets that the labor market is basically at full employment and pretty much everything that's not structural has been addressed. Do you agree with that, or do you see it differently?

WILLIAM SPRIGGS: I see it very differently. First off, for most of the last few months-- it's only in the last couple of months where Black workers have finally found success, when labor force participation really started to pick up for Black workers. As they constantly heard, oh, we're hiring. We're hiring. Only to find out, not really. We're not really hiring. If we were really hiring, then as the Black labor force participation initially picked up, then the Black unemployment rate would have plummeted. It's only in the last couple of months that we've seen that success from the increased labor force participation for Blacks.

But as to wages, let's remember that we have 21 states rapidly increasing their minimum wages in response to the long period we refused to raise the minimum wage at the Federal level. These states are raising their minimum wages by large amounts because they're on the path to either $12 an hour in some states or $15 an hour in other states. So the result is that low wage workers are suddenly getting, in some states, 10%, 12% mandated wage increases because the minimum wage is going up.

When the minimum wage goes up, then we get to see proof, as many of us have long argued, of monopsony. Those firms are suddenly confronted with a big shift in the overall wage offer that workers get to look at. The internal wage structure at some of those firms are highly challenged because they are monopsonies. And the response is that workers are going to switch jobs.

So job switching is ignited when I'm at my firm. The minimum wage goes up to $11 an hour, and I'm making $10.90. Suddenly I'm making $11. Now I'm going to be upset, because $11 is the minimum. I was above the minimum before. Now I'm at the minimum. I start looking at other firms, and how are they responding to these minimum wage changes. The monopsonists get caught flat-footed, and they start losing workers. Because they find out yes, there really is a market, and you're no longer in control of the market. And they have to respond to it. Some of them are good. Some of them are bad.

Every time the minimum wage goes up in an expansion, we see this ripple effect that takes place because it also induces job to jobs switches, which are good for the economy, because it means we're reallocating workers from monopsonists and low productivity firms towards those that are competitive firms paying competitive wages and who are more productive than the other firms. This is a good thing. It's going to take place.

If the Fed is going to react every time we beat back some of the bad things that are allowed in labor markets when you have high unemployment rates, we're going to have problems. The Fed has to accept that we are undoing some of the monopsony-- the bad effects of monopsony in our labor market. That's what's taking place.

You've got to remember, we've changed our labor force. At the beginning of the 21st century-- of this century-- we had 15 million manufacturing workers. We had 9 million restaurant workers. When the pandemic hit, we had lost 3 million manufacturing workers. We were down to 12 million manufacturing workers. And we had gained 3 million restaurant workers. We had 12 million restaurant workers.

So of course, if you change the minimum wage, when these workers are a much bigger share of the labor force and are as important as manufacturing workers, it's going to look like, oh, wages are really doing something. But it's the minimum wage, and it's the adjustment that we're going to go through as the states finalize what they're going to do, reach the $12 or $15 or wherever they're headed. We have this little turbulence. It's going to go through this for a little while.

But no, we are not near maximum. If we don't get our nation back to the employment to population ratio for prime age workers that we had in 2001, going forward, we face huge problems. Because we have a slower population growth. We have the aging of our nation. And as the workforce gets older, and we have people who are retired. This is going to be a big problem that we don't have the employment to population ratio where it was in 2001.

And let's remember, the gains we're observing in labor force participation are older workers returning to the labor force as well. Again, Black workers are just the canary in the coal mine. They are giving you the signal that workers are ready and willing to come when you're serious about hiring. And we're seeing older workers come back into the labor force, the ones that people have been writing off and saying, oh, they're retired, and they're drawing their bonds and whatever. But they're coming back into the labor force. The Fed needs to be patient to allow that to happen.

HEATHER LONG: Thanks.

WENDY EDELBERG: Heather, can I just jump in? I want to say one-- do you mind?

HEATHER LONG: Yep.

WENDY EDELBERG: So the issue on what's happening with wage pressure and the relationship between wage pressure and inflation. I want to just add some nuance to the points that Michael was making. So we have seen extraordinary wage gains in some sectors, such that real wages have actually even gone up, in the leisure and hospitality sector and in the retail trade sector, in particular.

But in fact, wages have not kept pace with inflation in most other industries. So yes, we have seen wage pressure. But the pressures that we're seeing right now in the economy that, in my mind, are like flashing red lights where the Fed needs to act, the source of that is not what's coming from wage pressure. Just to say it again, most workers have actually seen real wage declines in the past year. Not all. And in fact, lower income workers have seen real wage gains.

So I want to make it a distinct point between the wage pressure I'm seeing and the fact that I think that we're at full employment. I think we're at full employment. I am not hugely worried about the wage pressure that we've seen. And in fact, most of the inflation pressure that we've seen, it's actually hard to pin that on wages. It looks like it's coming from other factors.

HEATHER LONG: Yeah, let me pick up on that.

WILLIAM SPRIGGS: I just want to say, thank you, Wendy, because that's exactly right. Again, those restaurant workers are getting these big boosts. Inflation is much worse for food consumed at home than it is for food consumed away from home. So the one area where we do have wages rising at very high levels that's not causing the wage pressure, the price pressures we're looking at.

HEATHER LONG: Yeah. Wendy, I want to ask you. Obviously, so much of monetary policy is trade offs. You have to balance the labor market with the inflation pressures that we're seeing. How concerned are you, as the Fed prepares to raise interest rates pretty aggressively this year, that we could see a backslide in the labor market? We could see more people losing jobs, even, and unemployment rising.

WENDY EDELBERG: Well, the monetary policymakers have a hard job ahead of them. We all know that soft landing-- being able to slow the economy perfectly without causing a recession-- is a tall order. But I am very confident that they are aware of those risks, and they're working hard to create a soft landing.

I think one of the things that's going to be hard is that the pandemic ebbing will do some of the work. And so the Fed will have to think about how to be responsive to that in appropriate ways. So I think it's absolutely right that given what we're facing with the pandemic now and the structural issues that we've talked about now a lot, it is appropriate for the Fed to be taking its foot off the gas, and they need to act.

But to the degree that the pandemic ebbing brings back labor supply and to the degree that it increases demand for services, but it's not increasing demand for services too much, because we have a lot of waning-- fiscal support is waning. So the waning of fiscal support and the ebbing of the pandemic I think may do a lot of the work to bring down inflation. And so the Fed will just have to be responsive to that and not over-respond because it's not taking those factors into account.

HEATHER LONG: Yeah. And then we have the war in Ukraine, which is another big uncertainty. Michael and Bill, I want to turn to you for our final words here. So many of you have brought up these longer-term structural problems that are such a big part of holding back many people from getting jobs or getting the jobs they deserve.

Can you both say-- Michael, we'll start with you, and then Bill, we'd love to close out with you. What long-term challenges does the US economy truly need to address, either through monetary or fiscal, to reach truly inclusive full employment? What would be-- I mean, there's obviously a million things you could cite, but what are the two or three at the top of your list that you think, I really wish policymakers either at the Fed or in Congress and the White House or state houses would address a couple of these. Michael, let's start with you.

MICHAEL STRAIN: Well, I'll just kind of pick up on the discussion of the employment rate and of wage growth to answer that question. Right now we have an employment rate of 80% among workers ages 25 to 54. That's pretty close to where it was before the pandemic hit and roughly a point and a half below its peak in 2001.

I completely agree with Bill that we need to get back to where we were in 2001, and that should be a goal for policy. I think that's more of a goal for fiscal policy than monetary policy, especially given the state of the economy right now. And I agree with Wendy that we should be shooting for a situation where inflation-adjusted real wages are growing faster than they were prior to the pandemic and certainly faster than they are now, because for most workers, they're negative right now.

And I think there are many ways to achieve those goals. I would highlight two. One is to increase the productivity of the workforce, and that comes through state houses doing a better job with K through 12 education. It comes from the federal government and state governments doing a better job with job training.

I think there are some promising developments in worker training. The past several decades have been-- well, the '70s, '80s, and '90s were pretty disappointing, in terms of the government's ability to increase the skills of the adult workforce. But over the last 10 years or so, I think there actually have been some promising developments in that area, so there's reason to be optimistic.

A second policy is to encourage participation. The earned income tax credit can draw people into the workforce and should be made more generous as a way to increase the employment rate, as a way to get more people involved in the economy. And then something Bill brought up earlier, making the labor market more competitive by removing anti-competitive barriers and by clamping down on the anticompetitive practices I think is critically important to helping workers, particularly lower wage workers, participate more fully in economic life and command higher wages in the labor market.

HEATHER LONG: Thanks. Bill, we've got about minutes. Bring us home here on what you think or that should be the top of policymakers agenda.

WILLIAM SPRIGGS: I think the Fed has to constantly remind itself that it has a brake pedal, it does not have an accelerator pedal. And in the environment that we're in now, they need to really, really remind themselves of that. 30% of the inflation rate now is because we cannot get enough chips to restore American automobile manufacturing anywhere close to where it was pre-pandemic.

When we had a strike with General Motors a couple of years back, US auto production dipped for two months to about 80% of its previous capacity. Right now, we are at 40% below where we are pre-pandemic. We were as low as 60% in February of last year. This is the longest period we have had such low auto production. Nothing the Fed does can help that.

In fact, what the Fed is doing now will make it worse. Because what the auto manufacturers are doing is desperately trying to get chips. And they cost more money for them, because they're not from the suppliers that they were used to. And these aren't the most efficient suppliers, and they're trying to build a better, more diverse supply chain. We need them to develop.

There is a real correlation between the Fed deciding post-1980 that inflation was the worst thing that ever happened to a low-wage worker, and we maintained unemployment rates that were significantly higher than the pre-1980 level. There's that high correlation to the rise in inequality. It's not just a correlation, though.

And so the Fed needs to remember that if-- as Black America endured the entire 1980s with a double digit unemployment rate every single month because the Fed had convinced itself that the unemployment rate can't fall below 5% because this is really bad for the economy. We're going to fall off the Earth. Until finally in the late 1990s, the Fed decided, well, maybe that's not true. And sure enough, we got to the end of the 1990s, and we found the unemployment rate can go below 5% and the Earth doesn't end.

And so finally, Black America went from double digit levels of unemployment. To say that people are better off living in a permanent recession makes them better off because, my goodness, you're better off in a permanent recession living for a decade and a half at double digit unemployment, and that my goodness, if you ever got to 6%, you wouldn't like it. I'm sorry. I'm sorry to tell you, people actually liked it when the unemployment rate became closer to what the rest of America sometimes experiences during a normal recession.

And the economy is made better off when people with associate degrees get unemployment rates that look like high school graduates. When people with college degrees actually have unemployment rates that are low, it is a better economy. And understanding what those disparities mean in terms of the labor market efficiency and destroying the efficiency of the market.

When you flood people with unemployment, it hurts investments in training, because firms don't want to train workers if they're going to turn around and get unemployed. It hurts investments from workers themselves, because they experience this unemployment and get kicked out of the labor force. There are ripple effects that the Fed is not fully incorporated in the cause of high unemployment.

And I'm quite convinced they're going to get this wrong, and they're going to find out that because we have a much more porous unemployment insurance system, we have a real problem with fiscal policy that they are risking very high unemployment that they cannot solve for inflation that they also cannot solve, because they can't get chips into auto factories.

HEATHER LONG: Well, I have to be the annoying person who has to put the brakes on this great discussion. But we've brought up so much good material and ways to think about inclusive full employment and what the Fed needs to do and what other parts of government and other parts of society need to do. A huge thanks to Wendy Edelberg from the Brookings Institution, Michael Strain from the American Enterprise Institute, and William Spriggs from Howard University and the AFL-CIO. Follow them on Twitter, and keep an eye on their great research. Thank you three.

And now It's my privilege-- we've been talking to economic thinkers who have given us a lot to think about. Now we are going to turn the discussion to policymakers. I am pleased to welcome today, Charlie Evans, the president of the Federal Reserve Bank of Chicago, and Raphael Bostic, president of the Federal Reserve bank of Atlanta, to give us their perspectives on how do they think through all of these different issues and then have the very hard job of having to make the call at the end of the day of what levers to pull and how to assess these different parts of the economy. Welcome to you both.

RAPHAEL BOSTIC: Hi, Heather. Good to see you.

HEATHER LONG: You, too, Rafael. Charlie, let's start with you with the key question of today that we've all been debating and thinking about. We'll hear from Charlie first, and then Rafael. Charlie, how do you define inclusive full employment? What would your definition be? And how do you see what the Fed can really do to help achieve it here?

CHARLIE EVANS: Well, thanks, Heather. This has been a really fascinating commentary here. It's clearly very important for the Fed to understand the structure of the economy and for labor markets, in order for us to find the proper setting for monetary policy so that we can average 2% inflation over time and also promote full and inclusive employment.

I think the presentation by Bhash Mazumdar, the commentary by Bill Spriggs, Wendy Edelberg, and Michael Strain, it's clear everybody agreed that there are impediments in the labor market that are preventing some under-advantaged groups from full participation, full opportunity.

And I thought Bill Spriggs comment was very powerful, when he said many concepts of maximum employment just include, just allow accepting these impediments to be a part of how we should benchmark that. We need to understand how this affects how we should set monetary policy.

I think our previous framework, we struggled, in my opinion, to implement what we meant by symmetric inflation pressures. And we had low inflation, below 2%, for a very long period of time. I thought that there often was too much concern about inflation all of a sudden rising above 2%. And so preempting inflation sometimes took place, and it limited how strong the labor market could be for a variety of disadvantaged groups. So understanding how to characterize this is very important.

I don't focus so much-- it's very important to have a measure of what you think full employment, maximum employment, optimal maximum employment, and all that. In our framework, I really focused a lot on we want to eliminate employment shortfalls. And if we eliminate employment shortfalls, I don't believe unemployment is necessarily too low. At that point, you always pay attention to inflation. But if inflation is too low at that time, then a vibrant labor market is very important.

Now the current period that we're facing, with supply shocks and everything occurring makes it very difficult. And that's why you do have the trade offs that you talked about. But I really think that the positioning that our current framework allowed us to push as far as we could, and then things became overcome by events, by COVID, and chip shortages, and lots of things. We could talk more about that, and I know that Rafael has thoughts there, too.

HEATHER LONG: Yeah. Raphael, jump in on kind of how you see this inclusive full employment and what the Fed needs to do with this new framework implementation.

RAPHAEL BOSTIC: I'm happy to do that. But before I answer that question, I just wanted to thank the Chicago Fed for inviting me. I also wanted to thank the Chicago Fed for setting up this Economic Mobility Project and having this event.

When we think about economic mobility, the one fact or reality that hasn't really been highlighted as much today in the aggregate is that a lack of mobility, the lack of mobility that we have today, is actually costing all of us. There have been a bunch of studies that have been done. I would cite one by the JP Morgan Chase foundation, as well as research by colleagues at the San Francisco Fed, that suggests that US output would be somewhere between $2.3 and $2.6 trillion more if we had less inequality. If we had more mobility in the people being able to really achieve where they are. So this is a very important topic, and it's one that we at the Fed really have to pay an amount of attention to.

Now in terms of the specific question about how do I think about inclusive economic development. Now the way I think about it is we will be achieving this if we're in a situation where everyone who wants to work is able to find work that is commensurate with their full potential. Because then we are getting people-- really, Bill was talking about this-- people with degrees not getting paid to the productivity of that degree or not in roles that are consistent with the productivity of that degree. That's where we see constraints.

And if we can achieve that, 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 that we're not seeing it happen right now. The other thing that I would say on that is that I think my definition-- in the panel, there was some back and forth about are we talking about full employment? Are we talking about maximum employment? What are time frames?

To me, I think my definition kind of is an umbrella for all of those things. And I think everyone-- well, I hope everyone can see their definition of their role in terms of the definition that I would put forward. I would also say I really appreciated Bhash Mazumdar's presentation to open, and I was very happy that he showed Raj Chetty's map, where he showed where mobility was lowest and highest across the United States.

And I hope that everyone who was watching noticed that where it was lowest is exactly in the places that are my district. So if we think about the Southeast, I represent and our Reserve Bank represents much of the area in this country where mobility is incredibly low. And it's one of the reasons why we've highlighted economic mobility and resilience and trying to increase it as a strategic priority for us, because that's so important for so many communities throughout our district. So this is really-- I wish we had thought about putting up the Economic Mobility Project ourselves. But Charlie, we'll be happy to work with you and your team as much as possible.

Now in terms of monetary policy, I would say two things. So one, I think the goal here is to try to have sustaining growth that occurs over an extended and as long a period as possible. And what we've seen through our experience is that longer economic expansions allow groups that have not historically participated in the marketplace to participate more. You highlighted in the first session, all the speakers spoke to labor force participation, employment to population ratios.

And we know that those numbers are higher across the board when the expansion lasts longer. But there's a bet. And there's always economists on the one hand. On the other hand, if you push it too hard, there's a chance that you will have to create some sharp reductions in economic activity.

So the second principle that I think we need to have is to make sure that we are trying to minimize the volatility or the variation of experiences over time for people. So people are not getting in the jobs and then being thrown out of jobs, not getting back into it. Because I think we've also seen that is tremendously disruptive.

And that really turns to us thinking about that dual mandate, and it brings in the notion that in some instances, when employment runs long, the economy can get too hot. You can start to see upward pressure on prices that then can induce that volatility. So we've got to be trying to do a balancing act here. And I know you're aware of this.

I hope that many of those of you who are watching are following all of our Twitter feeds and things. Because you'll know that our bank, the phrase that we're using is observe and adapt. Because to walk that fine line, to really hit the mark at the right time in the right volume, requires us to have a clear sensibility and a clear understanding about the dynamics that are prevailing at any moment so that we can understand the dynamics of our policies.

And in today's environment, we've got all the structural issues that were talked about earlier. We've still got a lot of COVID issues that remain. We have the war in the Ukraine and the conflicts in other places that you noted. There's a lot of moving parts that are going on that we're just going to have to monitor if we want to hit this right.

HEATHER LONG: Charlie, I'm curious to get your take on the current environment. Would you say that we're at full employment, or at least as close as you can get if there weren't COVID and the supply chain issues that we're mentioning?

CHARLIE EVANS: Well, I mean, clearly, the unemployment rate is low at 3.6%. I think labor force participation could be higher. We have still many people who haven't come back into the workforce. And so I think that's important. I think it's critical. In fact, I mean, we are at a moment where year after year, we've got the aging of the population. We've got the demographic challenge during the slow recovery after the great financial crisis. Maybe we didn't need to worry about that so much, because we didn't have strong enough aggregate demand.

But now, in an environment where we need all the workers that we can get to show up, it becomes a challenge. And so now if you look back and take stock of the fact that you've got the aging of the population and skills haven't kept up with the change in technology, right? We've also learned from all of the remote work at home, if you were in a privileged situation where you're doing professional services, back office work, you can work at home. You don't have to be on site, up close with people, like essential workers in the Fed, then you can take advantage of technology. Keeping up with those skill sets is going to be an important part of that.

So I struggled with the comment. I guess I hadn't quite internalized the comment that perhaps the labor market is unhealthy now. I think I agree with the way Bill Spriggs characterized this. We've got a lot of people who have opportunities. We have people in minimum wage jobs, fast food and other places, that have more opportunities to switch. We've got a lot of job switching.

I think we're seeing a lot of resorting at all skill levels, where it could easily be the case where in our own bank, it's like people have wanted to work remotely. And maybe we kind of said, well, yeah, but you just can't do that. We don't have the technology. We have demonstrated that the technology exists. You can't go back and say, we don't how to do it. We did it. So now I think you're going to get a resorting where some recruits are saying, I want a remote job. Well, that's not what this is. So they cross you off the list. Resorting, that's going to look painful.

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. If you used to schedule workers and then when enough people didn't show up that day in your store, you sent them home. It's harder to implement that business model, and it's going to be more pricey.

So there's a lot going on. I don't necessarily see it as unhealthy. I do say it's a big challenge for businesses. And businesses have seen strong earnings. And I think that they've worked hard and they're finding ways to make that work. So I think we just need to continue working the situation.

HEATHER LONG: And I guess how do you strike that balance, Charlie, going forward of obviously, you all have made the decision that you need to address-- raise interest rates to some degree this year to address inflation. What makes you confident that you won't have bad spillovers on the labor market, that we won't see job losses as those interest rates rise?

CHARLIE EVANS: So I think we're in the middle of adjusting monetary policy from our very accommodative stance after COVID towards a neutral setting by the end of the year, probably certainly early next year, depending on what the pace will be. And if you are of the view that the current inflation pressures are from accommodative policy, strong fiscal policy, then you're probably going to be expecting that we need to restrict aggregate demand. And I think that would put pressure on jobs.

I'm of the opinion that a lot of what we've seen-- surely a lot of what we've seen are supply chain issues and that those are going to come off the boil. It's still going to take longer than I thought initially with the chip shortages and all kinds of things. But I think that once those come down-- used car prices, just think about it. They went up 40%. If they come down 5%, that's very helpful for any inflation calculation.

So 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. But there's a lot to be monitoring still.

HEATHER LONG: Yeah. You know, Rafael, you stressed a number of great points. And one of them was the delicate trade off that you and your colleagues face every day as you're thinking about this. I'd say one of the biggest criticisms that I'm hearing of the new framework is that some people think it was too tilted towards focusing on the labor market and that that's maybe why some Fed leaders missed the inflation rise that has been happening in the last few months.

I know you both know the former head of the central bank of India, Raghuram Rajan. He recently called it that you all were like prisoners of this new framework. So I'm curious for you to respond a little bit to that. Do you think this framework at all caused the Fed to be a little bit behind in this environment? Or would you push back at that sort of prisoner characterization from our friend?

RAPHAEL BOSTIC: Yeah. I guess for me I don't think that the framework really informed or animated how we approached policy through much of last year. I think people do need to keep in mind that we're still in the pandemic. And as we were going through last year, much of the time in last year, the aggregate numbers were not screaming that things were about to pivot to an extreme outcome.

I will also say that among our set of colleagues, there were differences of opinion as to how rapidly the economy was going to come back. And Heather, you've reported on this many times. There was a lot of uncertainty around what was going to happen and how fast were we going to see jobs come back and how fast was inflation-- or was inflation going to respond at all.

So I actually don't think that that's right. For me, I will just say it's time that we get off of our emergency stance. I think it's fully appropriate that we move our policy closer to a neutral position. But I think we need to do it in a measured way and make sure that all the other uncertainties-- all the churn that's happening because of the war in Ukraine, because families are starting to understand how they're going to address their child care needs. As retirees start to think about, well, did I retire too early? Or should I come back, because wages are starting to be much more attractive in a much more dynamic labor market?

We're going to learn a lot as we go through this year. And I would also just say with the fading-- with the reduction and the calming of the fiscal stimulus and that waning over time that's also going to lead to a pullback in aggregate demand in ways that should allow the demand and the supply responses to start to come closer to each other.

Where we are now, we have an imbalance between demand and supply. And we've got to find and monitor to make sure that we understand how both the demand and the supply sides are working. I think our movements and the waning of fiscal policy will get us to see demand start to come down.

And I think resolution and decisions by workers, as well as resolution of some of the supply chain issues, will allow the demand to come up-- will allow the supply to come up in ways that they kind of meet in the middle, and we get back to a more normalized level of inflation.

HEATHER LONG: Yeah. We're all hoping you succeed, that's for sure. Charlie, obviously, you all at the Chicago Fed, you have this amazing Economic Mobility Project that you've launched. I know you personally go around and meet with a lot of different groups of workers to try to better understand the pulse of what's going on.

What more do you think in kind of a medium or longer term role the Fed and monetary policy needs to play to try to get to a more inclusive and broad-based full employment? Obviously, there's many structural issues. But what do you really think the Fed specifically can do here that it's not already doing?

CHARLIE EVANS: Thanks. Like all of my colleagues, we go around our districts and we talked to stakeholders, business people, people in communities, people who are facing challenges. And economic mobility is definitely a really important one. I mean, we see-- in over the last 20 or more years, we've seen very large increases in income inequality. Opportunity, I think, is extremely important.

The educational support. Just looking at Bhash Mazumdar's key factors explaining the geographic variation. Better primary schools are obviously very important. The skill set. Michael Strine mentioned that. There needs to be more support-- Michael Strain, sorry-- K through 12. And I just think that that's very important, keeping our finger on the pulse of what's taking place.

I mean, at some level we do have to be modest and remember, being the Federal Reserve, we've got one instrument, and it's a short-term policy rates. It's the setting of monetary policy. And we can only do so much in terms of getting the economy towards maximum employment. We want to promote maximum employment, inclusive employment, with opportunity for everyone.

In my mind, it becomes very important that we not pull the trigger too early to worry about risks that maybe we don't have enough evidence, like higher inflation when inflation was 1 and 1/2%. Letting the economy continue to run, but paying attention to inflation. Because that's our dual mandate, so we have to be very careful.

But I think that a lot of the commentary about oh, the Fed is trapped by not being able to be preemptive against inflation. Instead, they were waiting for inflation to pick up. Well, up until very recently, that is what we were facing for the last 14 years that I've been president. I think if you look at the February 2022 CPI report, you saw, top line, 7.9% CPI. Right next to it was the column, February, 2021, top line CPI, 1.7%. Core, 1.3%.

It's very quick that we saw differences in the inflation experience. And so I think that we're trying to be careful. You just don't want to preempt the best possible labor market that we can achieve until you're very confident and you're looking at the appropriate trade offs.

HEATHER LONG: Let me just follow up real quick. Obviously, most of us are focused mainly on the monetary policy side and the levers you can pull or not pull there. But you all also do a lot of bank regulation and overseeing of regulatory side. And obviously, there's been a lot of issues over the years with redlining and not giving those types of loans to certain types of borrowers. Do you see, Charlie, any more need to do, maybe from your other toolkit, where the Fed could be more involved?

CHARLIE EVANS: Well, I think we have to follow through on our requirements with our authorities with bank supervision with the Community Reinvestment Act, making sure that there's fair access to credit, fair lending, and all of those features. And so making sure that consumer compliance is up to what it's supposed to be.

I think banks want to do the best for their customers, and they want to be making loans to everybody. But making sure everybody has access to that lending. We had a very nice series, the Fed series, Racism in the Economy, where we heard on the credit side that the PPP loans, the banks didn't necessarily-- there were minority businesses that found it more difficult to find their place in the queue. They were in the back. And that was a challenge.

So I think making sure that everybody has the opportunity that they should be afforded is really very important. And we have a responsibility there. All the bank supervisors do. That's part of the regulatory environment.

HEATHER LONG: Rafael, you sort of touched on this earlier in your opening remarks, but I wanted to circle back to it. One of the other criticisms you sometimes hear when people look at the new framework or look at what the Fed does now is you hear some people say, mission creep, that the Fed is trying to do too much, and that by taking a larger role in trying to make a more equal economy or to eliminate some of these inequalities in the economy, that that's going beyond the remit that Congress gave to the Fed. I know you have thought deeply about this. How would you respond to those critics who see some of this economic mobility work and inclusive economy work as mission creep?

RAPHAEL BOSTIC: So I would say a couple of things on this. At a very high level, I think in order to really understand what the implications of our policy are going to be for the macro economy, we actually have to have a deep understanding of the micro economy. Because the macro is an aggregation of all of those things.

And a lot of what we do is really try to understand where the market is, how it works, and understand ways that it might work better. Because if it works better, than our policies will be more effective. And as I said before, our economy will be more resilient. It'll be more productive, and it will move ahead further.

So as I go around and look and talk to business leaders and talk to communities and see how individuals are managing through the economy, to the extent that I see areas where there are challenges, where people are not getting full opportunity to access their full potential, I want to make sure that our policymakers are aware of those things so that they can then decide what steps are appropriate to move forward.

I think for us, one of the things that-- one of the ways that I think we are most effective is that we see a lot on the ground all the time, and we want to pass that on as much as possible to give people a sense of how the economy is working and where there are opportunities for us to do better. And as I said, I think that makes our policies more effective.

And it actually allows us collectively to not have to rely on the Fed's policies so much in order to get good outcomes. So I think that these things are part and parcel of everything that we do. The other important thing, I would say-- and this has been a hallmark through this entire session today-- is that these are economic outcomes.

These are things that really do have direct connections and linkages to the US economy and how it performs. And ultimately, that's the benchmark by which we get judged. We get judged in terms of employment and how the economy responds to demand in the revelation of prices, and ultimately in terms of GDP growth and output.

And I hope that-- a phrase we use a lot in our bank is people positive. Our goal 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.

And so understanding ways that we can reduce that imbalance, both today, but also by taking steps through other policy makers to make it less likely that those imbalances will arise in the future, I think that makes us all better off. And I think that allows us to more fully achieve our mandate as we move forward.

So I hear the criticisms, and I take them on board to make sure and check myself to make sure that the things that we're doing are being done all in the service of our dual mandate of maximum employment and stable prices. I think there's a pretty good case to be made that we are achieving that.

HEATHER LONG: Yeah. Charlie, I want to give you the last word here. And obviously, we're sitting here two years after a huge crisis hit the world with the pandemic and the COVID, and it turned into one of the most unequal recessions of modern US history. What would you say that you personally learned during these past two years about inequalities in the economy that maybe you didn't know before or that you didn't know as deeply as before?

CHARLIE EVANS: Well, thanks, Heather. And thanks to my colleague Raphael Bostic for just a terrific panel, and everyone here. This has been a very challenging time since March of 2020. I like to think that I've learned how hard everyone has worked and how resilient they've tried to be in the face of just unbelievable anguish and unfair consequences, horrible health outcomes from COVID.

And I've observed that there's a tremendous amount of unfairness in this. For those of us who could do our jobs remotely, digitally, we could go home. Maybe my biggest challenge was worrying that a dog was barking somewhere in the house. Whereas essential service workers had to come down, keep the cash services going and taking care of that. And so that exposed them to risk.

People were very resilient. They really worked hard in all of that. And it's just been a tremendous honor to be a part of this. You mentioned mission creep, and that sort of brings me to this unfairness, which is part of why I think this Economic Mobility Initiative is really so important. And the work that we've seen already from Bhash Mazumdar.

I'm a macro economist, and when I hear Raphael say, GDP's pretty good, and I go, yeah, it is. And then I kind of go, but GDP is this average concept, and we kind of tend to think that averages are good enough. But then I stop, and I see more things, like median household income for a family of four, $67,000. That's 50th percentile. Mean, average household income, family of four. $97,000. That's the 65th percentile.

We've focused. We've creeped. We've had income creep focus into the 65th percentile. And I just have to ask myself and others, why don't we symmetrically worry about the 35th percentile? Why don't we do a little more median macroeconomics, if you will? This is the microstructure that Rafael was talking about that's so important for us to really appreciate and understand.

And I think that through the initiatives like this, where we're focused on everyone having opportunity, being inclusive in our economy, enjoying the benefits, that's an important part of what every policy maker-- whether it's monetary policy or up on the hill or in your local, state and local government really cares about.

And I'm really excited to be part of it. And I want to thank everybody for helping us out so much on this terrific inaugural event.

HEATHER LONG: Yeah. Thank you both. Obviously, the three of us could talk for hours about these issues. There's so much more to say. Both the Chicago Fed and the Atlanta Fed have done great research in this area and continue to do so. I encourage people to check it out. Raphael Bostic, president of the Atlanta Fed, Charlie Evans president of the Chicago Fed, thank you both for your comments and thoughts today.

And now I have the very great privilege of turning it over to the amazing Kristen Broady, the director of the Chicago Fed's Economic Mobility Project, to bring us home.

KRISTEN BROADY: Thank you, Heather. That was an amazing panel. And thank all of you for joining the Federal Reserve Bank of Chicago's Economic Mobility Project for our inaugural event. We'll be sending out a post-event survey, so please be on the lookout for it. We value your feedback. A recording of the event and a summary will be available on our website at ChicagoFed.org/mobility in the next few days.

On our website, you can also learn more about the Economic Mobility Project team and the policy research from Chicago Fed economists. We hope that you will join us for our next virtual event, which we will host during the week of Juneteenth, where we'll focus on the determinants of the racial wealth gap and policy solutions that can help mitigate it. Again, thank you all for joining us, and have a great rest of your day.

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