An @RichardJMurphy question we can answer

Why is 7% considered full employment?

The Great Man asks.

To which the answer is, it isn\’t.

His background is that Mark Carney says the BoE won\’t raise interest rates until unemployment is below 7%. He thus makes the leap to thinking that Carney is claiming that 7% is full employment. Which isn\’t what is being claimed at all.

Rather, we\’ve currently got a policy regime that is suited to the aftermath of a recession. We\’ve interest rates that are near zero, real interest rates that are negative. This seems a reasonable enough policy stance when we\’ve got grossly excessive unemployment. Exceptional times call for exceptional policy.

When unemployment comes down below 7% again then we can think about returning to more reasonable policy as well. Like, perhaps, raising interest rates so that savers can get some return on their money? Or whatever: the point being that Carney\’s not saying that 7% is full employment, rather that falling below that level would be the end of grossly excessive unemployment.

3 comments on “An @RichardJMurphy question we can answer

  1. “When unemployment comes down below 7% again then we can think about returning to more reasonable policy as well.”

    So, Mr Worstall, you think current policy is unreasonable?

    Interesting.

    Very interesting ….

    DP

  2. Setting interset rates with a regard to employment is a very political thing to do. Objectively the unemployment rate has nothing to do with running a banking system. It is using the BoE as an arm of goverment, with political motives. This Pretty much like the dual mandate of the FED and a foreign concept for the UK.

  3. Except of course the UK labour market could be as tight as a drum with labour shortages and inflation pressures everywhere and yet measured unemployment be 10%, quite simply because all the jobs are being done by Poles, Spaniards and anyone else in the EU. Targeting employment for monetary policy is hazardous at the best of times, but when the measure is as meaningless as this it is plain daft.

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