In a speech in June 2016, Jerome Powell, a member of the Federal Reserve’s Board of Governors, noted that the fraction of the U.S. population aged 25 to 54 who were working or actively looking for work “is now below those of most other advanced economies, including the U.K., France and Germany, for example.” He also stated: “I am inclined to believe that there are potential workers at the margins of the labor market who will return as the recovery continues.”
a. Briefly explain how Governor Powell’s two statements are related.
b. Why is it important for the Federal Reserve to accurately estimate how many people might still be brought back into the labor market as an economic recovery continues? Why might it be difficult for the Fed to make such estimates? What potential policy errors might the Fed make if its estimates are inaccurate?