Kevin Warsh and the Future of Employment

N P R. This is the Indicator from Planet Money. I'm Darian Woods. I'm Waylon Wong and welcome to Jobs Thursday. Jobs Thursday. Yes, the Bureau of Labor Statistics released its numbers for the month of June today. It Tsod today earlier than usual because of the july fourth holiday. So we're sending you into the long weekend with a look at the labor market. The US economy added fifty seven thousand jobs in June and the unemployment rate was four point two percent. That's mostly unchanged from May's rate of four point three percent As you know, we make a point of studying the jobs numbers every month because it tells us how workers in the US are doing. The Federal Reserve cares a lot about the employment numbers too. In fact, it's legally obliged to care about jobs. That's because Congress gave the Fed what's known as a dual mandate, stable prices and maximum employment But last month, new Fed Chair Kevin Warsash presided over his first interest rate decision and press conference And he had a lot to say about stable prices price stability Price stability. Priceability. Its just stability. prrice price, price, price, priceiceability. Priceability Pry civilility He didn't talk much about maximum employment. So does Kevin Warsh even care about jobs? Oh, the humanity. Today on the show, we talk about how the dual mandate is tricky for the Fed to fulfill, and we parse some early clues about how Kevin Worsh might be tackling this part of the mission. Let's take a whirlwind tour of central bank mandates around the globe. We will start in Frankfurt with the European Central Bank. Their mandate is to maintain price stability. Then ono the Bank of Japan. Price stability. The Swiss National Bank. Price stability. Bank of England? Financial and price stability. Then we have the Reserve Bank of Australia It talks about both price stability and full employment, which mirrors the Federal Reserve in the US But this two goal structure is relatively rare among central banks. And the Federal Reserve's current mission is kind of recent. It wasn't until the late seventies that Congress changed the Fed's mandate to be about price stability and maximum employment. This update came out of a pivotal time in American history, the civil Rights movement One leader who pushed for this legislation was Caretta Scott King, the widow of Martin Luther King Junr. The King Center website has a video from the nineteen seventies, and in it, Ctta Scott King speaks about full employment as part of a larger set of policies. has to do with Healthcare, housing Education, transportation, crime. energy, all of the problems that we face in our central cities and in our rural areas too Economists like Claudia Sam have their own way of describing this concept. Claudia used to work at the Federal Reserve, and she knows all about the labor market because she actually has a recession indicator tied to unemployment named after her. It's called the SOM rule. Maximum employment broadly speaking is the idea that everyone who wants a job has a job It's like the sweet spot for the economy. People are working, the ones who want to be working They have good job opportunities but it doesn't have a number attached to it. Maximum employment can't really be measured, and this goal poses a couple of different complications for the Fed complication number one, these two goals of maximum employment and price stability can be in tension with one another If we push too hard We might end up with a bunch of inflation. And then that would hurt exactly those same workers that were trying to get across the finish line Here's why pushing on jobs can affect inflation. So the Fed has one main tool it is disposal, interest rates Lowering rates makes it cheaper for people and businesses to borrow money and then demand for stuff goes up. Well, if there's demand out there, if consumers are out buying and businesses are investing, well they're going to need workers to make it happen And so then that can kind of indirectly lead to more employment. But what if there aren't enough workers to fill those jobs at current wages? or there aren't enough workers trained in a particular skill? So then all of a sudden, you can point a lot of demand into the economy, have labor shortages and end up causing inflation and a lot of stress on businesses. And it's not like the Federal Reserve has this very you know, fine dial they can turn and optimize for different parts of the economy. The Fed's tool with interest rates is a very blunt instrument And this bluntness of the instrument is the second complication for the Fed when it comes to promoting maximum employment Raising or lowering interest rates can only do so much for a system as complex as the American labor market The labor market has had Big structural inequities, discrimination, differences across workers, whether it's race, ethnicity, education. I mean, like there's a lot of unequalness in the labor market. and that's been baked in For decades and decades For example, the unemployment rate for black workers has historically been higher than the overall rate. Jobless rates can also vary quite a bit by state. The Fed can't use interest rates to boost a specific group of workers. So that's a pretty big constraint on its ability to promote maximum employment. Getting every worker across the finish line, that's tough Like that is not something that we have accomplished at any point in the U. S. history, and the Feder Reserve again cannot get us there on its own, there's a danger of giving the Fed too many goals, with too few tools, and also a danger of this idea that the Fed can just do it all because it can't In twenty twenty, the Fed updated its language around its strategy described maximum employment as a quote broad based and inclusive goal New Fed Chair Kevin Warsh has expressed skepticism around this phrasing. Last year, he gave a speech where he questioned whether the new language was, quote, simply a political nod. That speech was before Warsh was formally nominated for Fed Chair Last month, during his first press conference, Warsh critiqued how some of his predecessors tackled the dual mandate donon't share the view that was expressed a few generations ago Federal Reserve chairman show up at a podium like this and say you gotta choose And you're going to have to decide whether you're willing to tolerate highigher inflation to put more people at work I don't believe in that. War said he believed low prices and strong employment could be mutually compatible, but he didn't say much more about jobs. And economist Claudia Sam and other Fed watchers clocked some important changes in the Fed's statement. For starters, the statement was shorter. It was a tse one hundred thirty two words mentioned the Fed's dual mandate, it removed an explicit reference to maximum employment Claudiaus says she doesn't like these changes I think it's important for Fed communication is a tool to be accountable for the Fed to explain itself to regular people. Like not everybody knows what the dual mandate is It's like, C come on, just spell it out. Let's be open and clear about where where our mission is and what our responsibilities are. I guess the deletion of that phrase, it's like one way to read it could be, oh, he's just trying to be less wordy. But another reading of it could be He's signaling where his priorities are, right? And do you feel like it's kind of like an open question, like the intention behind that deletion? Absolutely. We're left guessing But there are these questions about, well what would Wch want the committee to do if the labor market did start to wobble? Would they come to the rescue? Would they stand firm on inflation? There's so many ways to think about and to find maximum employment. We've never heard from Kevin Warsh How he thinks about it, how he defines it That's a really important missing space. Claudia says that historically, when the two parts of the Fed's dual mandate have been in tention, Fed will focus on the more urgent matter And rightight now, inflation is the priority This episode was produced by Ingeiaa Correz was engineering by Travis Hagan. It was fact checked by Sierra Juaz, Kaking Canon is our show's editor and the indicator is a production of NPR.