Higher unemployment could soon be called full employment

03/10/2010 10:30 am EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

You know your team’s in trouble when they start talking about moving the goal posts.

At the same time as economists are talking about the possibility that the economy will create net jobs in March, the Federal Reserve is thinking about redefining full employment for the U.S. economy.

And as you might suspect, the Fed isn’t talking about raising the bar.

Yesterday Charles Evens, president of the Federal Reserve Bank of Chicago, told a conference that the Fed is considering changing the definition of full employment from an unemployment rate of 4.75% to an unemployment rate of 5.25%.

So why does full employment mean an unemployment rate of 4.75% or 5.25% anyway?

Because economists at the Fed know that even when the economy is running full out some people are unemployed at any point in time because of the normal churn of hiring and firing. Exactly where that normal level is, however, is a judgment on the changing characteristics of the economy.

Right now economists at the Fed are debating whether the economic speed limit for the economy will be lower in the years ahead than it has been in the past and whether that plus an increasing mismatch between the skills in demand and the skills of laid off workers mean that it will take longer for unemployed workers to find new work. An increase in the duration of unemployment and job hunts would mean that number of people out of work at any point in time would rise.

The U.S. economy has seen as big increase in the duration of unemployment during the Great Recession. More than 40% of the unemployed have now been out of work for more than six months.

The question for economists at the Federal Reserve and elsewhere is whether this increase in the duration of unemployment is just a result of the recession or a signal of some more permanent change in the U.S. economy.

If the Fed is talking about increasing the definition of full employment—to 5.25% from 4.75%--you know where it is coming down on that question.

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