7 [13]  situation in recent years has probably made it more attractive to participate in the labour force. Monetary policy cannot solve structural challenges with greater labour supply Higher labour supply is basically positive as it should lead to higher employment in the long term – which is beneficial not least in light of the challenges we face as regards a greying population. Higher labour force participation in the long term raises the economy’s output potential, which means that the wheels can turn more quickly without the risk of overheating and rising prices, which monetary policy ultimately needs to subdue. But a prerequisite for this positive effect is that the increased labour supply also leads to higher employment. As it takes time for the labour market to adapt to rapidly increasing supply, it is likely that the increase will, in part, result in higher unemployment in the near term. High demand in the economy can facilitate the adjustment. But the extent to which greater labour supply leads to higher employment in the longer term is determined by how the labour market works and by the matching of job-seekers to vacancies. This is particularly true of groups with a vulnerable position on the labour market, for example persons born outside Europe. We have had a strong labour market in recent years and not only the labour force but also employment are now on a historically high level. The expansionary monetary policy has contributed to this development.
To get an idea how long ago that was, 1984 was the year I finished college. The labor market has also improved dramatically and is now very strong. Over the past 12 months through January, the economy added over 6-1/2 million jobs. The unemployment rate has fallen from the pandemic peak of 14.7 percent to just 4 percent today. In fact, there are many more job openings now than there are people looking for work. Another clear sign of the hot labor market is that wages rose sharply last year, especially for lower-paid jobs. Inflation I mentioned earlier that the Federal Reserve has two goals: maximum employment and price stability. The very strong labor market is great news in terms of achieving maximum employment. However, we have seen inflation rise to a level that’s far too high. Ten years ago, the FOMC set a longer-run goal of 2 percent inflation—that is, prices rising 2 percent per year on average.1 From 2012 through 2020, inflation averaged below this 2 percent goal. But the inflation rate started rising sharply in 2021. The Fed’s preferred price measure, the personal consumption expenditures (PCE) price index, rose 5-3/4 percent last year, its highest reading since the early 1980s. This sudden, sharp rise in prices reflects a unique set of circumstances that has driven supply and demand out of balance. For those of you who have studied economics, you will not be surprised that I ascribe this rise in inflation to demand outpacing supply.