The Fed and Labor Market Potential

Written by Richard Hokenson 

The Fed’s projection that the unemployment rate has more room to decline is very encouraging. Their median estimate of 3.8% this year and then to 3.6% through 2020 is nearly a full percentage point lower than the Fed’s long-run forecast of sustainable unemployment. Considering that it was only two years ago that the Fed’s estimate of NAIRU was 5.5%, it is clear that this is a moving target. Nevertheless, this suggests that the Fed believes that faster growth can entice more potential workers into the workforce, e.g. additional repeats of the 653,000 decline in the number of persons not in the labor force that occurred in February.

Although we concur with their assessment that there is still considerable slack in the labor market, a related issue that we continue to monitor is the availability and receptivity of foreign-born workers. It is reassuring that growth in foreign born employment has been very strong the past two months (see Chart 1), which has meant that foreign born employment as a proportion of total employment is now at a record high of 17.54% (see Chart 2).


This update was researched and written by Richard Hokenson, as of March 23 2018