The Federal Reserve faces a fundamental question that will have an enormous impact on the livelihoods of millions of Americans—what is the lowest unemployment rate possible that doesn’t cause an unacceptable level of inflation?
Economists long have thought that the economy is at “full employment” at a rate of around five percent. Below that, employers would be forced to pay higher wages to attract and retain workers, which in turn would compel them to raise prices, sparking inflation. The theoretical trade-off between unemployment and inflation is what is known as the Phillips Curve.
However, while the current unemployment rate is extremely low at 3.6 percent, inflation remains below the Federal Reserve’s two percent target. Wages have risen, but below expectations. For this reason, some suggest that the Phillips Curve no longer applies.
