Of course, to judge the success of policy, you have to know when you’ve actually reached your targets. Knowing when we hit our inflation target is straightforward. After all, a 2 percent increase in PCE prices is an easily identifiable number. But full employment is a far more nuanced concept. As the FOMC’s annual January "Statement on Longer-Run Goals and Monetary Policy Strategy" recognizes, maximum employment can be influenced by a large number of structural factors that can change over time and may not be directly measureable. In light of this uncertainty, the Committee considers many factors in gauging maximum employment. As the extremely relevant research presented at this conference makes clear, judging the degree of slack along these many dimensions is a difficult and complex task. But it is one that is critical for the conduct of monetary policy — we must have a good idea of what constitutes achievement of our full employment target.

Our Chicago Fed research staff has been working long and hard, and in my remarks today, I will briefly talk about some of our results that touch on several of the most contested labor market issues on the table today. These involve labor force participation, job openings and wages. To give you the punch line, this research and work done by others in the field lead me to conclude that, although we have made great strides, a good deal of slack remains in the labor market.

Labor Force Participation and Employment

As everyone in this room is aware, the labor force participation rate has fallen throughout the recession and recovery and is now at a 35-year low.[1] As Julie Hotchkiss described earlier this morning, it is well understood that much of the decline is due to trends that far predate the Great Recession. The movement of baby boomers into retirement age and the long-running declines in teenager and prime-age male participation would have significantly reduced labor force participation rates independently of the economic downturn.

Chicago Fed economists first did work on the prospects for a declining labor force participation trend back in 2001 — near the time the rate peaked at just over 67 percent.[2] Even after revisiting this topic numerous times and with multiple generations of research assistants running the programs, their views about the trends that are consistent with the composition of the population and a labor market near equilibrium have not changed much since then.[3] Among the many robustness analyses they performed, their models produce nearly the same trend for labor force participation as they have since 2001.[4]

Depending on the details of the specification, Chicago Fed economists estimate that at the end of the second quarter of 2014, the labor force participation rate was between 1/2 and 1-1/4 percentage points below trend. Furthermore, the participation rate was as much as 3/4 of a percentage point below predictions based on its historical relationship with the unemployment rate. This disparity suggests that there likely is an extra margin of slack in labor markets beyond that indicated by the unemployment rate alone.

It is interesting to dig further into these "labor force participation gaps." Virtually all the gap during this cycle has been due to withdrawal from the labor market of workers without a college degree. By contrast, a participation gap never materialized for college graduates, even during the depths of the recession. There is no simple explanation for this striking contrast. It could be yet another symptom of long-running but difficult-to-model trends in the economy, such as job polarization and changes in social programs, which particularly impact the lower-skill work force.[5] Regardless, the divergent work behavior across education groups strikes me as an important fact and deserving of much further research attention.

The declining trend in labor force participation also influences how fast the economy can produce new jobs in the long run. Our estimate of the trend in payroll employment growth over the past 15 years averages roughly 100,000 jobs per month. Looking ahead, we think that declines in the labor force participation rate and population growth will bring the trend in payroll employment growth down to fewer than 50,000 jobs per month by 2016. This new benchmark probably will only become apparent in the monthly data once the economy closes the current 3.8 million employment gap. But barring sizable changes in immigration policy, policymakers and the public will need to get accustomed to a slower base of employment growth by the latter part of the decade.

Job Openings and Hiring

This brings me to the issue of hiring and job openings. The job openings rate, as measured by the U.S. Bureau of Labor Statistics’ Job Openings and Labor Turnover Survey (JOLTS) data, started climbing immediately after the recession and made it back to its pre-recession high this summer.[6] Yet, despite some improvement, the JOLTS hiring rate remains disappointingly below where it stood before the recession began.[7]

Why might firms advertise openings aggressively but be slower to fill them? Posting a vacancy is only part of the hiring process. Jason Faberman of the Chicago Fed, in collaboration with Steve Davis of the University of Chicago and John Haltiwanger of the University of Maryland, estimate that the overall effort that firms actually are putting into filling a job vacancy fell by over 20 percent during the recession. It has been slow to recover since and today still stands 8 percent below its 2006 peak and, for that matter, below where it was anytime during the last expansion.[8]

Davis, Faberman and Haltiwanger argue that low recruiting intensity may reflect employers’ increased hiring standards. It could be that hiring standards become more stringent during an economic downturn. For example, if there is an unusually high degree of downward nominal wage rigidity, as Mary Daly and Bart Hobijn of the San Francisco Fed document has been the case over this cycle,[9] then employers may respond by filling fewer openings. If this story is true, then the high ratio of vacancies to hires is a further indication of slack in the labor market.

Alternatively, more stringent hiring standards might signal a persistent structural problem. For years, I’ve been hearing business people complain of difficulty in finding sufficiently qualified candidates. Furthermore, we hear anecdotes about firms being extremely picky and waiting for the perfect applicant. These behaviors may be indicative of a skills mismatch between jobs and workers. If this is the case, then it is possible that the steady-state level of the vacancy rate has increased, which would help explain why the improvement in vacancies we’ve seen over the past few years has been slow to translate into similar progress on hiring.

Wages

If skills mismatch were an ongoing problem, we’d expect to see wages rising for those with the skills in demand. There is evidence of increasing wages in some occupations, but wage growth in general continues to be very modest at about 2-1/4 percent per year. That is a long way from the 3 to 4 percent benchmark implied by productivity growth and our inflation objective. Indeed, over the past three years, the unemployment rate has fallen by a percentage point per year; yet real wage growth has barely budged. It’s hard for me to imagine a full labor market recovery without genuine improvement in compensation growth. But am I wrong? Has the wage Phillips curve completely broken down?

Some claim the answer is no — you just have to look at the right measure of unemployment. Alan Krueger, Judd Cramer and David Cho, among others, have shown that the relationship between real wages and the short-term unemployment rate during this cycle has been in line with historical norms, whereas the historical spike in long-term unemployment exerted minimal pressure on real wage growth.[10] Of course, the short-term unemployment rate is now close to its pre-recession level. So their model implies nominal wage growth should be returning to something close to the fundamentals implied by productivity growth and inflation.

My staff’s research comes to a somewhat different conclusion. Using models similar to those Michael Kiley presented here this morning,[11] they find that pools of potential workers other than the short-term unemployed, notably the medium-term unemployed and the involuntary part-time work force, substantially influence wage growth at the state or metropolitan statistical area level.[12] Today, medium-term unemployment is down a good deal, but the involuntary part-time work force is still very high. According to their model estimates, if labor market conditions were at their 2005–07 levels, average real wage growth would be roughly 1/2 to 1 percentage point higher over the past year — another sign of the cyclical shortfall in labor market health.

To sum up, with many important measures of labor market activity still well short of our estimates of cyclical norms, I believe it is a bit premature to say that we are close to our full employment target. That said, while it has taken longer than anyone would like, our progress has been good. And there is good reason to anticipate that we will achieve full employment and price stability within the FOMC’s current forecast horizon. Indeed, in the Committee’s Summary of Economic Projections released about a week ago, most participants anticipated that the unemployment rate would return to its long-run neutral level by the end of 2016 and that inflation then would be in the range of 1-3/4 to 2 percent.