HIGH EMPLOYMENT: GOAL OF MONETARY POLICY
High employment, or a low rate of unemployment, is another key monetary policy goal. Unemployed workers and underused factories and machines lower output.
Unemployment causes financial distress and decreases self-esteem for workers who lack jobs. Congress and the president share responsibility for the goal of high employment.
Congress enacted the Employment Act of 1946 and the Full Employment and Balanced Growth Act of 1978 (the Humphrey-Hawkins Act) to promote high employment and price stability.
Although the Fed is committed to high employment, it does not seek a zero percent rate of unemployment. Even under the best economic conditions, some workers move into or out of the job market or are between jobs.
Workers sometimes leave one job to pursue another and might be unemployed in the meantime. Individuals also leave the labor force to obtain more education and training or to raise a family, and reentry may take time. This type of frictional unemployment enables workers to search for positions that maximize their well-being.
Structural unemployment refers to unemployment that is caused by changes in the structure of the economy, such as shifts in manufacturing techniques, increased use of computers, and increases in the production of services instead of goods. The tools of monetary policy are aimed at affecting economic conditions throughout the economy, so they are ineffective in reducing the levels of frictional and structural unemployment.
Instead, the Fed attempts to reduce levels of cyclical unemployment, which is unemployment associated with business cycle recessions. Sometimes economists have difficulty distinguishing structural unemployment from cyclical unemployment. For example, in 2010, some economists argued that while the high level of unemployment had a large cyclical component, structural unemployment might also have risen as the decline in the residential construction industry was expected to persist for a number of years.
How much an increase in structural unemployment was contributing to the high unemployment rate was unclear, however. When all workers who want jobs have them (apart from the frictionally and structurally unemployed) and the demand and supply of labor are in equilibrium, economists say that unemployment is at its natural rate (sometimes called the full-employment rate of unemployment).
Economists disagree on the exact value of the natural rate of unemployment, and there is good reason to believe that it varies over time in response to changes in the age and gender composition of the labor force and changes in government policies with respect to taxes, minimum wages, and unemployment insurance compensation.
Currently, most economists estimate that the natural rate of unemployment is between 5% and 6%, or far below the 9.6% unemployment rate the U.S. was experiencing in October 2010.
Labels: Financial Management