This year’s annual conference of central bankers in Jackson Hole is focused on the right question: how to determine the extent of labour market slack in the US and other advanced economies. This is the most pressing issue for Janet Yellen, Federal Reserve chairwoman, and her colleagues, given the limits of what monetary policy can do about structural unemployment.
There has been a legitimate debate over what lies behind the low US labour force participation rate, which measures the proportion of adults who are either working or looking for work. Some blame demographics, with two large cohorts (ageing baby boomers and women of child-bearing age) both disproportionately likely to leave the workforce. Eight years ago, a group of Federal Reserve staff predicted in an academic paper that labour force participation would fall to about 63 per cent this year for precisely this reason. That turned out to be eerily close to reality, suggesting the US may be at full employment. If so, there is nothing the Fed can do to improve matters; it would cause inflation if it tried. Continue reading »