The Fight For Full Employment Starts Now

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In February of 1946 President Harry Truman signed the Employment Act into law. The legislation, which historian Alan Brinkley deemed the “last great battle for the New Deal,” committed the federal government to “promote maximum employment.” At the time, millions of soldiers were returning home from victory on the battlefield, yet the losses of the Great Depression continued to haunt the nation, despite the economy being larger than ever. Systemic questions loomed large: Would jobs be waiting for the returning soldiers? Could the breakneck pace of growth during the war be sustained? Would a transition to a peacetime economy result in disaster? But New Dealers had a solution: full employment.

Economists have been fighting over the very meaning of this phrase for time immemorial.

Leon Keyserling, the New Deal economist and drafter of the Employment Act, argued full employment simply meant everyone who wants a job can get one — period. This also happens to be the view currently endorsed by Lael Brainard, a member of the Board of Governors of the Federal Reserve System, and someone floated as a possible successor to Fed Chair Jerome Powell.

Today the government remains committed to full employment, at least in theory. Since 1977 the Federal Reserve has operated under a dual mandate: price stability, which they judge to be an inflation rate of 2 percent; and full employment. For generations, however, the definition of full employment has been hotly contested among central bank economists.

The Bureau Labor Statistics defines it as “an economy in which the unemployment rate equals the non-accelerating inflation rate of unemployment” (what’s called NAIRU) and economic output is at its full potential. In this case, the only sorts of unemployment remaining are frictional unemployment — unemployment arising from people voluntarily switching between jobs—and structural unemployment — unemployment associated with structural shifts in the economy, such as a transition away from manufacturing. 

The practical use of NAIRU as an policymaking indicator, as popularized by Milton Friedman and Edmund Phelps, is that inflation will accelerate if unemployment falls below the NAIRU because it could cause an out of control spiral in which prices are raised to meet rising wages, resulting in a significant decrease of consumer purchasing power.

One major challenge of this definition is that the NAIRU is not observable. In other words, it’s an economic theory that ties unemployment and inflation together in a crude formula resulting in vague guesses as to what level of employment corresponds with a stable inflation (which the Fed deems to be 2 percent). The best guess as to what “full employment” might be has historically been an economy in which headline unemployment is at 5 or 6 percent, and Black unemployment—which is consistently twice the white rate—is 8 to 10 percent. The reality of the economy in the late 2010s — unemployment well below 5 percent matched by high output and low inflation — undermined traditional understandings of NAIRU. This dissonance renewed interest among economists, and political progressives, in redefining full employment.

But why quibble about the functionality of this model or that one when we can focus on the benefits of there clearly being much more room for employment growth than previously thought? Aiming for full employment gives more people jobs and redistributes powers to workers: the power to leave an abusive job; the power to demand a living wage; ultimately, more power to achieve economically secure lives.

This would disproportionately help Black, brown and other workers who have faced negative stigmas in the labor market for generations. And aiming for full employment would boost real wage growth too, which has been essentially absent for decades. While it’s hard to overstate the benefits of full employment it has been elusive throughout most of American history.

How exactly we should measure and get to full employment remain open questions. Right now, roughly nine million fewer people are employed today than just before the pandemic struck.

In February, the Congressional Budget Office projected that, without additional recovery measures from government—such as the additional $1.9 trillion in economic relief currently being ushered through Congress to aid Americans who are still suffering—the unemployment rate would remain above pre-pandemic levels for years. In this scenario, the unemployment rate will inch down, and the jobs lost during the crisis will be clawed back by 2025 or so. That’s the sort of snail-speed recovery we experienced after the Great Recession. And it’s certainly not a forecast the American people should accept.

According to the CBO, the 3.5 percent unemployment reached under the Trump administration is not in the cards. The CBO thinks that an unemployment rate that low went beyond full employment and was a sign of “overheating” in the economy. In their models inflation was bound rear its head as a tight labor market bid up wages (though in reality, wage growth was modest and inflation remained below expectations). Thus, the CBO believes 3.5 percent unemployment is not a sustainable goal.

Other economists are jumping on the CBO bandwagon, warning that more stimulus from government, such as President Biden’s $1.9 trillion relief package which just passed the house, risks pushing unemployment to 2019 levels and could “set off inflation pressures of a kind we have not seen in a generation.” 

I respectfully disagree. The CBO has consistently underestimated full employment and the output potential in the economy, leaving people unnecessary unemployed and an economy growing slower than it should be. In fact, the CBO has become notorious for it among liberal wonks that have been tracking the office’s work.

The price of listening to the CBO’s analysis in the coming months — which, once again, will almost surely be overly conservative — would be catastrophic for the millions of people that will be left unemployed and the tens of millions who will see no or low wage growth as a result of weak labor markets.

Even if inflation rises modestly above the Federal Reserve’s target, there are few, if any, defensible reasons for not pushing unemployment back below 3.5 percent, where it was under President Trump. In fact, pushing unemployment to three percent, or lower, is one of the most straightforward ways for laborers’ to claw back some of their share of the nation’s economic gains.

In truth, nobody knows a time-tested measure for what percentage represents true full employment. The surest way to find out is for policymakers to err on the side of working people for once.