 If we want to, we can structure the market differently. I want to talk now about how full employment is a policy choice. First off, the extent to which workers have jobs is primarily a matter of public policy, that it's not a question just of individual effort. And just to be clear, I'm not saying individual effort doesn't matter, but the fact that we could have millions unemployed at certain times and other times, employers are looking for workers, that's a policy choice. So we have to be very clear on that. Secondly, that when we have high rates of unemployment, it disproportionately hurts the most disadvantaged in the labor market. The third point I want to make is that when you have an economy with low unemployment, we have many lower productivity, lower paying jobs go unfilled. And that's not a bad thing. So what we have today in 2022 is the unemployment rates low, we have many low wage employers saying they can't get good workers. I like to joke about this is the hard to get good help story that you can't get workers. Well, that's what you expect to have when you don't pay enough. When you have a strong economy, when you have a tight labor market, that means that you'll have rising wages, especially for those at the bottom, what are typically low paying jobs. Those are the ones who are benefited most by a tight labor market. So in laying out this argument, I want to sort of briefly touch on alternative views of the economy. Those held by John Maynard Keynes and those held by Milton Friedman. And again, these are some extent caricatures, as it always is when we refer to a famous person. You know, these are sort of their basic story and how they view the economy. Okay, so Keynes' great innovation was that he saw that the economy was typically limited by the level of demand. So what that meant was that if we had more demand in the economy, that we could have more output, more employment. It's not a secret. We know what the sources of demand, and again, Keynes laid out a framework for us that was very useful, that we have consumption demand. You know, we'd go out and buy a car, we'd get restaurant meals, we'd get health care, whatever. So we have various types of consumption demand. Secondly, investment demand. We have investment in firms do investment, whether they're building new buildings or building new machines, software. So all sorts of investment undertaken by firms. Net exports is source of demand. So if we have more net exports, we export more, don't increase our imports, that also is a way to increase demand. So if we're exporting more to Europe or Japan or the developing world, that increases demand in our economy. And lastly, government spending. Okay, so when the government spends money, whether it's on education, building roads, that also creates demand in the economy. And he made the very important point that if there's not enough demand in the economy to employ the available workforce, then the government create demand by spending more money or taxing less. Okay, taxing, of course, reduces the amount of money we have in our pockets. It will reduce consumption. So Keynes' big point here was that the government can to a very large extent control the amount of demand in the economy. If it wants to create more demand, it could spend more money. It can cut taxes or some combination thereof. And thereby increase demand in the economy. Okay, so this is the story we often hear about deficits being bad. Sometimes they can be. But the point here is deficits can create demand. So again, if we're in a situation where there's not enough demand in the economy, the government could run a large deficit, spending more, taxing less, can create demand in the economy. Government spending isn't wasteful. It doesn't have to be at least wasteful. It could be directly productive. So the government spends money on roads, on airports, broadband, education. These are all investments that the government makes that have payoffs in terms of increasing society's wealth over time. So Keynes made a joke, if you read through his book, The General Theory. He jokes about how even wasteful spending could be better than nothing. If we have a lot of unemployed workers, the government could pay people to dig holes and fill them up again. That would put people to work. But we would rather see the government spend money on something that's useful. It could spend money in education, developing software, whatever it might be. Point is that government spending can be productive. The contrast with Friedman is that he sees the economy, the size of the economy is largely fixed by the amount of capital, the skills of the workforce, and natural endowments. So what does that mean? Well, at a point in time, this day, we have so many buildings out there. We have so much equipment. We have whatever technology we have. That's the amount of capital. That's what we have today. We could have more tomorrow, but that's what we have today. Secondly, we have the skills of the workforce. Some people are very highly skilled as writing software, as doctors, whatever it might be. Other people might be less skilled. Okay, that's what we have today. Okay, so we have those skills. And then we have natural endowments. How fertile is the soil? So if we have very fertile soil, then we'll have a larger economy. Some places, some countries don't have very fertile soil, so they can't grow very much on their land. Harbors, some places are very lucky. We have very good harbors in the United States, in New York, in Boston, other places. Other areas, you have rocky coasts, so you don't have good harbors. We have the amount of capital. We have the skills of the workforce. We have our natural endowments. That's going to determine how much the economy could produce. And then if the government steps in and says, oh, we have too many people who are unemployed. So we want to increase employment. So what are we going to do? We're going to spend a lot of money. We'll have a jobs program, or we're going to spend more on education, or whatever it might be. Well, Milton Friedman would say, okay, if you do that, you're simply going to have more inflation. Okay, because the amount of people who are prepared to work, given the state of the economy, given their skills, that's determined, in effect, sort of naturally. That, you know, here's what we have. And that's going to mean that 6% of the workforce doesn't have a job. Okay, maybe we're not happy about that, but if we just were to spend more money, that's just going to lead to inflation, because the economy actually can't produce more than what it's now producing. And given the skills that people were employing, they're not producing enough to earn back what they're going to be paid. So it simply leads to inflation. And he came up with this idea of the non-accelerating inflation rate of unemployment. That's the acronym NARU. And the significance of that is that if you had a lower unemployment rate, the inflation rate would continue to rise. An important point here, the point is accelerating. So let's say, and people often said for many years, that the NARU was at 6%. So let's say we're unhappy and we go, oh, we don't want 6% unemployment. We want to get the unemployment rate down to 4%. Well, Milton Friedman would tell us, well, maybe you could do that for a period of time, but what that would mean is that the inflation rate would continue to rise. So if we're starting at 2%, it rises to three, it rises to four, maybe that's okay, but you'll keep rising. So we'll be at five, we'll be at six, pretty soon we'll be at 10, and eventually we have hyperinflation and no one thinks that's okay. So Milton Friedman would say, okay, you don't want to go down that path. You don't want to fool with the non-accelerating inflation rate of unemployment. If that's 6%, you aren't really doing anyone any favors by trying to get the unemployment rate down to 5% or 4% because you're not going to have a stable inflation rate. The inflation rate will continue to rise and then you're in this horrible story of hyperinflation where your money's not worth anything. People don't trust it and the classic story, people talk about Weimar Germany where people went to the stores with a wheelbarrow of money and they got a loaf of bread. Okay, so no one wants to be there. Well, I'm going to argue that the Keynes view of the world is correct and I think there's a lot of evidence to support that. And what I'm going to argue is that it's very important to try to get to lower rates of unemployment. Okay, first it's important to point out that the Nehru, this is not just an academic exercise. Okay, we have the Federal Reserve Board that in effect, I refer to them as the Nehru Enforcer because they've consistently acted over at least the last four decades to raise the unemployment rate to keep inflation from rising. And the most famous example of this was when Paul Volcker was chair of the Fed, 1979 to 1982, he jacked up the short-term interest rate, the Federal Reserve Board directly controls the overnight money rate, federal funds rate it's often referred to. He raised that as high as 20%, okay. More recent years, it's typically been around 2%, 2.5%, it's been zero during the pandemic recession. Okay, that threw the economy into a very severe recession. The unemployment rate rose to over 10% in 1982. That did slow inflation, there's no doubt about it. Volcker did this because the inflation rate was in double digits and he felt, or at least he argued that we had to do something drastic to get the inflation rate down. So he pushed interest rates through the roof, raised unemployment to double digits and that did get inflation down, okay. So we saw much lower inflation, inflation fell to 3% in the 1980s. He got inflation way down from the double digit levels where it had been. So in that sense, you could decide whether there was a good thing or a bad thing. He had a lot of unemployment and that did bring the rate of inflation down, okay. So that's one example of where we had the Federal Reserve Board quite explicitly raising interest rates to throw people out of work to keep the inflation rate down. Okay, this happened again, 1989 to 1990 under Allen Greenspan. Allen Greenspan raised interest rates. Again, he was concerned or so he said that the unemployment was getting too low at that point in 1989, it got into 5%, which again was below most estimates at the neighbor at the time. So he raised interest rates and we got a recession in 1990. The recession went from March 90 to March 91. And again, so you could tell the story that we raised the unemployment rate to lower inflation and it did have that effect. We saw this again when Janet Yellen and Jerome Powell were Fed chairs in the period 215 to 218. Again, they began to raise interest rates in advance of any evidence of inflation and they will say that, they said that at the time. They didn't see inflation but they saw the unemployment rate falling to levels that were below what was generally estimated as the neighbor. So they said we have to raise interest rates. Again, they'd been at zero following the great recession. They began to raise them a quarter point each meeting and they were worried or so they said that the unemployment was getting so low that we would start to see problems with inflation. Then we saw a change in heart by Jerome Powell. Again, it was Fed chair at the time and still Fed chair in 219. He said, oh, we don't see evidence of inflation and he recognized the positive effects that low unemployment had on those who were disadvantaged in the labor market. So beginning at 219 he said, well, the Fed under the law is responsible not just for keeping low inflation but it's also responsible for maintaining high levels of employment rather than preemptively raising interest rates as Greenspan certainly did in 94, 95 and Yellen and Powell had done in 2015, 2018. He's gonna wait to see if we see inflation and then he'll start to raise interest rates. So it's a very, very different view from what we'd seen at the Fed over the prior four decades. Let the unemployment rate get as low as possible and then talk about raising interest rates. Don't raise interest rates in advance of any evidence of problems with inflation. To illustrate why I think this is so important, let me distinguish between the idea of individual responsibility and a macroeconomic story for unemployment. So what I have here is the employment to population ratio. This is a percentage of that group that's employed for men between the ages of 25 to 34. So these are young men. We're looking at the Great Recession. So 2008, 2009 into 2010 where the percentage of young men that were employed fell sharply. So a lot of economists were looking at this and they're going, well, why is it that young men are not working? Well, rather than saying, oh, it's some issue with the economy, a lot of economists said, well, it's young men. They don't feel like working. And there was actually serious scholarly research that said, well, the problem is video games. Video games have gotten really good. So these young men are all, instead of working, they're watching internet porn. They're playing video games. They'd rather do that. So the problem's not the economy. The problem is the young men playing video games and watching internet porn. So people could tell that story, 2011, 2012. They couldn't tell the story a few years later. So if we look at what happened 2013, 2014, 2015, 2016, 17, 18, they're going back to work. So what you had happened was a situation where young men weren't working in 2010, 2011, 2012. That was because there weren't opportunities out there. Later on, the economy keeps growing. The unemployment keeps falling. Those opportunities come back. And guess what? These men are working. As far as I know, they could still play the video, same video games. They could still look at internet porn, but they were choosing to work. So clearly the story was one of the economy, the economic opportunities, the job opportunities available to these young men. I'd say based on this story, it looks pretty clear to me, it was a story of job opportunities in the economy, not that young men didn't feel like working. Okay, the next point, who is it that's most benefited by low unemployment rates? Well, the unemployment rate for everyone fell. So you could see for whites, it fell from about 4.5% in 1995 to about 3.8% in the year 2000. For blacks, it fell much more. For blacks, they were looking at unemployment rate of over 10% in 1995. It fell to about 6.5% in 2000. 6.5% is still high. So I'm not gonna say that's good, but obviously it's a lot better than an unemployment rate that's over 10%. So we're looking at a drop of close to 4% points. So it made a huge difference for blacks. It also made a huge difference for Hispanics. Okay, so the unemployment rate in 1995 was about 9% for Hispanics. It fell to about 5.5% in the year 2000. People with less than a high school education, similar story. So we had an unemployment rate for people with less than a high school education of about 9% in 1995 that fell to just over 6% in 2000. So again, you had a lot of people, less education, they were able to get jobs in 2000. They weren't able to get jobs in 1995. So we could look at the overall unemployment rate and say obviously 4% is better than 5.6%, but it makes the biggest difference for those who are disadvantaged in the labor market. So again, if we think of, how can we help black people who are having a tough time in the economy? Well, big part of that story would be try to get to something like full employment and you'll get a lot of black people who have jobs who went of otherwise. Which again, you look at the 6.5% unemployment that we had in 2000, that's not good. No one should be satisfied with that, but it's a hell of a lot better than we were at in 1995. So full employment or something close to full employment makes a very big difference for the most disadvantaged groups in society. Okay, this is another example. If we compare 2015 and 2019, okay, the unemployment rate continued to fall. In 2019, we got unemployment rate down to 3.5%. And again, it disproportionately benefited those at the bottom. So we could see that for whites, it fell, the unemployment rate over that period fell about half a percentage point. For blacks, it fell from almost 10% in 2015 to 6% in 2019. Okay, so again, a very large drop for blacks. For Hispanics, the drop was from about 6.5% in 2015 to just over 4% in 2019. For people with less than a high school education, the drop was from 8% in 2015 to about 5.5% in 2019. And for Native Americans, the drop was from 10% in 2015 to 6% in 2019. So again, it makes this point that when we were at a level of unemployment, that many thought it was full employment. So that's why the Federal Reserve Board was raising interest rates. They thought we'd hit the neighbor in 2015 or at least we're very close to it. That's why they were raising interest rates. It also shows up in wage growth. Okay, and what you see is real wages. They didn't fall for the top end. So if you look at the 95th percentile, they did fine. They saw decent real wage growth over that period. But for those at the bottom, the 20th percentile, their wages fell substantially over this period. So what that means is a worker at the 20th percentile of the wage distribution, that means they earn more than 20%, less than 80% of the wage distribution. They actually saw lower real wages in 1995 than what they had in 1979. The economy got richer. We got more productive. They didn't get any part of that. They actually had less. Okay, same thing for the median worker. Okay, so someone who's right at the middle of the wage distribution, they earn more than half the workforce, less than half the workforce. They also saw their real wages fall. So again, those at the top, the 95th percentile, they're doing fine. They got about 12, 13% more in 1995 than they did in 1979. Okay, but what happens in 1995 to 2001? This is a period where we got low unemployment. The unemployment rate got down to 4% in 2000. Okay, there you see good wage growth at the bottom. Over that five-year period, workers at the 20th percentile see their wages rise by 15%. Okay, that's pretty incredible. That's quite a difference. So in a five-year period, they see their real wages rise by 15%. The prior 16 years, their wages actually fell by six or 7%. Okay, so that tells you a story, at least to my view, about the benefits of low unemployment. Again, if you look at the median, their real wages are rising now. That five-year period of low unemployment, their real wages went up about 10%. Okay, and those at the top, they didn't do quite as well as they did in the earlier period. So basically you have a story, everyone's benefiting in this period of low unemployment. Those at the bottom are benefiting most. We have the recession in 2001. We have relatively high unemployment through the whole period, at least to my view, 2001 to 2015. We have the great recession in the middle, of course, very high unemployment, but you see a situation where most workers saw little or no gain in real wages. So again, those at the bottom, the 20th percentile, they lost again over this 14-year period. So their real wages fall about 5% over this 14-year period. Workers at the median, very modest wage gains. Okay, their wages rise about 2%. Those at the top, the 95th percentile, again, they're doing fine. Okay, so this period of relatively high unemployment, they see their real wages go up about 17%. Okay, so the point again is that when you have an economy with low unemployment, you have much more evenly shared wage gains. Those at the bottom have the bargaining power, the market power to actually secure wage gains. If you just try to think of that in very practical terms, when there's a low unemployment rate, think of the low wage workers. People are working at a restaurant, a custodian, people in the lowest paying jobs. They could tell their boss, you know, I could get a job across the street and they're gonna pay me a dollar an hour more. So I either want to pay raise or I'm going across the street. When the unemployment rate's high, they don't have that option. Okay, so it gives workers at the bottom, workers at the middle, it gives them bargaining power that they don't have in a period of high unemployment. So again, this emphasizes the importance of full employment or high employment, not just for allowing these workers to have jobs, but to give them bargaining power in the labor market so that they could share in the gains of economic growth. So again, I was making the point earlier that if we have a high rate of unemployment, that the government could spend more money or can cut taxes, have larger deficits, that will put people back to work. Also, the Federal Reserve Board plays a crucial role here. It controls interest rates, which in effect control the level of output in the economy, control the level of employment. So this is very much a governmental decision that it's not just a question of individuals working hard, developing skills. And just to be clear again, I would never say that people shouldn't try and get more skills, get better education or anything wherever, ask me, you know, young person. Yeah, try to get a good education, I'll allow you to get a good job. Absolutely, that matters. But the point is, it goes beyond that. So even people who are working hard, trying to get good jobs, they're gonna have a much harder time if we have high unemployment. And again, that disproportionately hits the most disadvantaged groups in society. Okay, so again, if we have high unemployment, that means disproportionately we're gonna see black people, people with criminal records, people with less education. They're the ones who are gonna be most disadvantaged. And then the last point is that high rates of unemployment, and I don't keep people from getting jobs, but it prevents them from getting wages, sharing higher wages, prevents them in sharing in the gains from economic growth. So long and short, full employment is a tremendously important policy that has a very big role in determining how many people are low income, how many people are in poverty. If we maintain high levels of employment, we can get a lot of people out of poverty, get them into better paying jobs, and allow them to share in the benefits of economic growth.