The U.S. expansion has put millions of people back to work and economists agree that the economy is now at or close to full employment. But what does that mean exactly? When economists talk about full employment, they don’t mean everybody has a job. And they don’t mean that even the rosiest economic health can cut unemployment to zero. If unemployment falls too much, inflation will rise as employers compete to hire workers and push up wages too fast. To economists, full employment means that unemployment has fallen to the lowest possible level that won’t cause inflation. In the U.S., that was once thought to be a jobless rate of about 5 percent. U.S. Federal Reserve economists currently put this so-called natural rate of unemployment at between 4.1 percent and 4.7 percent. All those estimates are above the June rate of 4 percent. Is higher inflation therefore on the way? Or is full employment a smaller number than economists suppose?
Since the U.S. recovery began in 2009, total employment has risen from 138 million to 155.6 million and the number of unemployed has shrunk to 6.6 million. As the labor market tightens, the Federal Reserve is debating the timing of its next rate hikes. The problem is that there’s more uncertainty than usual over how many people might start looking for work if labor-market conditions continue to improve, making it hard to pinpoint how much unemployment has to be tolerated to fend off inflation. That’s because the last recession was exceptionally severe and shook the labor market in ways that still aren’t well understood.