What is the lowest level of unemployment that the U.S. economy can sustain?
In recent years, it has become increasingly clear that low unemployment can be sustained without leading to an unwanted increase in inflation. In the recovery following the Great Recession, when unemployment fell below estimates of what could be sustained, the labor market proved remarkably adaptable, bringing many benefits to families and communities that all too often had been left behind.
Given the dynamic nature of the economy, it is not possible to know exactly how low the unemployment rate may be able to fall in a sustained way without causing excessive inflation. The lowest level of unemployment that the economy can sustain changes over time as the jobs market changes. For example, employers may use new ways to search for workers, and workers may use new ways to find jobs. Even in good times, a healthy, dynamic economy will have at least some unemployment as workers switch jobs, and as new workers enter the labor market.
For all these reasons, as it seeks to judge how far the economy is from maximum employment, the Fed will assess a wide range of information on the labor market and not rely too much on any single estimate of a sustainable longer-run unemployment rate. Furthermore, the FOMC aims to pursue its maximum employment objective so that very low unemployment without any evidence of higher inflation or other risks is not itself a cause for policy concern.