Several readers have responded to my recent posts on labor markets by suggesting that I am -- I'm paraphrasing -- (a) a toady for the Man; or (b) certifiably insane. At issue is my assertion -- and those of some of my colleagues in the Federal Reserve System whose work I have been highlighting -- that structural changes in labor force participation rates suggest the economy is operating pretty near its potential.
I have to confess that I ask for it by occasionally throwing about terms like "strong", "robust", "weak", "normal", and so on. Not a single one of those words has any meaning independent of a coherent benchmark and, to the extent that I employ them loosely, I deserve all the abuse I might get.
To be clear, "potential" is a term without normative content. To say that job growth is near its potential -- or that the economy is operating at "full employment" or that unemployment has reached its "equilibrium" level -- is not to say that anyone expects you to be happy about it.
Here's an example I like. Suppose that your objective is to produce the maximum sustainable amount of coconuts. In Cleveland, we have pretty limited expectations about how big the local crop can be. While Northeast Ohioans might truly desire to produce copious quantities of the fruit, the conditions are simply not conducive to success -- potential output is low.
In any given year, we might find that by some stroke of good fortune we produce a bumper crop (which I guess would be more than zero). We would, no doubt, describe the output for that year as "robust." But the yield would still be pretty disappointing by, say, Hawaii standards.
The revisionist take on labor markets is that "full employment" in the US is less than what we had been thinking. There are both negative and positive interpretations of this development. The negative interpretation is that the existing skill set of the labor force is not well matched with available jobs. The more positive interpretation is that individuals are pursuing other opportunities, perhaps associated with educational opportunities, perhaps associated with nothing more than a desire to stop and smell the roses.
The truth is probably all of the above, but the essential point is that the expectations about what monetary policy can achieve have, for many of us in the business, changed. Cleveland ain't going to be Hawaii, no matter how low we set the federal funds rate.