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Fed Should Shift Focus to Expand Employment

Topics: Current Events

If we want the economy to really rally, we need to do something about unemployment. It seems, at first, a semantic ploy, to call for the U.S. Federal Reserve to shift its approach from slashing the jobless rate to actually expanding employment. But there is a difference, and it’s less subtle than you might think.

“The Federal Reserve is making modest progress in its push to reduce the unemployment rate. But that is not the jobs goal Congress actually established for the Fed,” reads an April 29 article in the New York Times. “The central bank is supposed to be maximizing employment. And on that front, it is not making progress.”

Huh. Interesting distinction, and one even the Fed, as evidenced by its strategy for economic recovery, doesn’t appear to understand. The Fed’s stimulus plan right now is to buy up $85 billion a month in Treasury and mortgage-backed securities. Fed Chairman Ben S. Bernanke points to the slight housing recovery, rising stock values and uptick in car sales as proof the plan works. He seems less than intent on changing tack despite all the criticism.

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Though unemployment figures dropped a few fractions of a percent in recent months to 7.6 percent by the last count, that’s largely because Americans gave up trying to find work. Just under 60 percent of the nation’s labor force holds down a job, a figure about 5 percent less than the pre-recession high. But employment growth has kept neck-and-neck pace with population growth–effectively a plateau.

So really, progress isn’t as promising as declining unemployment figures would have you believe. It’s a false gain to get to a 6.5 percent jobless rate by shrinking the labor force instead of by adding jobs. A few economists recently that the number of people actively looking for work dropped below the number of unemployed who want jobs but stopped looking, the NYT story says.

“[Those economists] argued that the Fed should continue its stimulus campaign until those people were drawn back into the job market, and were able to find jobs — in other words, that the Fed should focus on employment rather than unemployment.”

St. Louis Federal Reserve President James Bullard added to the warnings, telling the central bank earlier this month that monetary policy may not be the best way to grapple with the American jobs crisis.

“The idea that the Fed should ‘put more weight’ on unemployment does not fare well in this analysis,” he says in a prepared statement. “Such an approach may be highly counter-productive.”

Instead, he says, the Fed should double down on price stability, which would be more in line with its authority and expertise.

“Monetary policy alone cannot effectively address multiple labor market inefficiencies, and so one must turn to more direct labor market policies to address those problems,” Bullard adds.

Maybe the steady uptick in compensation reported by PayScale analysts will organically lure more people into the job market. There is, after all, a link between unemployment and wage trends.

Tell Us What You Think

What do you think of the Fed’s approach to employment recovery? We want to hear from you! Leave a comment or join the discussion on Twitter.

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(Photo Credit: Dan Smith/Wikimedia Commons)

Jennifer Wadsworth
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