How well the economy is progressing toward the Federal Reserve’s goal of maximum employment is reflected in a range of indicators that evolve over time. Beyond the unemployment rate, two key metrics of labor market health are the labor force participation rate and the employment-to-population ratio. The aging of the population is reducing the levels of both measures, implying that they are unlikely to return to pre-pandemic highs. However, these two indicators remain well below their demographic trends, and analysis suggests that they will not recover to trend until 2024.
The Federal Reserve’s mandate includes a commitment to “maximum employment.” As described in the Fed’s monetary policy strategy, this is “a broad-based and inclusive goal that is not directly measurable and changes over time” (Board of Governors 2021). Moreover, it is not captured by any single indicator such as the unemployment rate but instead reflects assessments of a wide range of indicators (see, for example, Gilchrist and Hobijn 2021). Two key indicators are the labor force participation (LFP) rate, which measures the fraction of the working-age population age 16 and older that is employed or unemployed (without a job and actively looking for one), and the employment-to-population ratio (EPOP), which excludes unemployed individuals.
Figure 1
Labor force participation and employment-to-population ratio
Figure 2
Retired individuals as a share of labor force nonparticipants
Figure 3
Labor force participation: Actual and trend
Figure 4
Employment-to-population ratio: Actual and trend
Our analysis of the LFP rate and EPOP suggests that these indicators are still significantly below their demographic trend values that are consistent with long-run maximum employment. Combining the downward trend in both series with their likely slow adjustment to a tighter labor market suggests that both will reach their long-run maximum employment levels in 2024.
In the meantime, other labor market signals currently are very strong, including low unemployment, record job openings and quits, extensive worker shortages, and consequent faster wage growth. These indicators suggest a labor market that is already very close to maximum employment, conditional on labor market constraints arising from the pandemic. However, our analysis suggests that achieving the labor market’s longer-term potential may require a few more years of expansion.
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