The job market’s sweet spot
The New York Times
Just how low can unemployment go? asked Neil Irwin. Economic theory suggests there is a “magic number” for the jobless rate—a sweet spot where virtually anybody who wants a job can find one, while there’s still a “bare minimum” of unemployment as people move between gigs, as well as low inflation. Yet “economists have no idea” what this number might be, as it is constantly shifting, and their uncertainty “has huge economic consequences.” The problem has to do with the Federal Reserve’s mission to keep inflation in check. If unemployment falls below the ideal level, it can presage damaging inflation, signaling to the Fed that it is time to raise interest rates. Fed chairman Jerome Powell has said he believes the sweet spot is when the jobless rate is in “the low 4s.” Does January’s 4.1 percent unemployment qualify? Or could joblessness be allowed to “drift lower” without sparking inflation? In 2013, the Fed estimated the sweet spot at 5.5 percent unemployment. Luckily, it didn’t begin raising interest rates when it hit that figure, or “millions of Americans who are now working would have been consigned to unemployment for no good reason.” It’s now up to Powell to decide whether he is willing to “test the lower limits” of his estimate. Millions of Americans’ economic fate depends on his getting it right.