Why It's Possible to Have Too Much Employment in the U.S.

Leah Millis | Reuters

It's impossible to have an economy with 0% unemployment, but it's also difficult to maintain low unemployment without initiating painful inflation.

"It's hard to tell Americans we can have too many people working," David Wessel, director of the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution, told CNBC.

Since 1977, the Federal Reserve has focused on creating maximum employment and maintaining stable prices, commonly known as the dual mandate.

Yet, maximum employment is difficult to quantify.

"[Maximum employment is] this more sort of amorphous thing," Rucha Vankudre, a senior economist at labor market analytics firm Lightcast, told CNBC. "There isn't a number and there isn't one particular measure, either."

However, at the Federal Open Market Committee news conference in January 2022, Federal Reserve Chairman Jerome Powell announced that "labor market conditions are consistent with maximum employment."

The Fed cannot directly control the unemployment rate, but when the central bank adjusts interest rates in response to inflation, it can indirectly influence the unemployment rate.

Maximum employment is also difficult to quantify because existing measures of employment, such as the unemployment rate or the labor force participation rate, often do not account for certain groups of people.

For example, the unemployment rate does not include discouraged workers, who want a job but have stopped looking for one because they feel like they will not be able to find employment.

"The good news is that we do see labor force participation picking up again," ZipRecruiter chief economist Julia Pollak told CNBC. "If companies find it easier to fill vacancies without bidding up wages so much and then passing on that cost to consumers with higher prices, then perhaps, just perhaps, we may be able to sustain this low level of unemployment without inflation growing."

Watch the video above to learn more about what maximum employment really means and how inflation impacts employment.

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