Labor Markets

The Fed now recognizes that its interventions have helped to create millions of jobs and promoted a better equilibrium in the long run. A deeper shift to its reaction function is now needed.

Labor force entry likely explains between ⅓ to ½ of the rise in US prime-age participation from its recent trough, and that the level and slope of labor force flows suggest prime-age participation may have even further to rise in the absence of exogenous shocks.

Canada shows us that even when PA EPOP is pushed to new highs, wage and price acceleration does not necessarily follow or persist. It is time we rethink the interactions between labor markets and inflation.

The Federal Reserve should revise its framework to achieve at least a floor rate of gross labor income (GLI) growth, as opposed to simply tweaking its existing strategy of targeting consumer price inflation.