Minneapolis Fed President Neel Kashkari on the labor market

The labor market is tight, with many employers desperate for workers. But there are signs it’s starting to stabilize.

Job openings rose to a new record high in June, but hiring also increased. That could be a sign that supply pressures are beginning to ease. July also saw a big jump in hiring.

But the surging delta variant is raising concerns about whether the momentum can continue.

What’s next for the economy? Guest host Chris Farrell sat down with Neel Kashkari, who leads the Federal Reserve Bank in Minneapolis, to find out. They talked about the labor market, inflation, racial disparities in the economy and more.

Kashkari expressed measured optimism about the current state of the economy: “The fundamentals are sound. The outlook is very positive. But we are still in a deep hole.”

He cautioned that July’s 5.4 percent unemployment rate may be misleading because many people are not actively looking for work and are therefore not counted as unemployed.

Kashkari encouraged businesses to help bring people back into the workforce with measures such as robust training. “Businesses have a role to play. It’s not just the government,” he said.

As the economy reopens, job growth could be slowed by boosted unemployment benefits, concerns about health and safety, and a lack of affordable child care, Kashkari said.

But Kashkari took issue with arguments in some economic circles that suggest people are easily disincentivized from working. “There’s a narrative that, ‘Oh, people are lazy, and they don’t want to work.’ It’s nonsense. The vast majority of Americans want to work.”

“I think there’s an inner American work ethic, that people want to work and want to contribute and want to take care of themselves and their families. We [have to] just create an environment where they have the chance to do that,” he said.

Kashkari said the data does not support claims that every government support program and shock to the economy discourages people from working: “What we saw in the last expansion is as the job market got tighter, all of these theories fell away and people came back to work.”

Kashkari signaled his support for the Federal Reserve’s new policy to pursue full employment and allow inflation to hit two percent before raising interest rates instead of preemptively raising them.

Some critics believe the Federal Reserve should focus on managing only price stability and inflation with its monetary policy, not employment. Kashkari said the data doesn’t support their arguments.

For the entire recovery period following the 2007-2008 financial crisis, inflation remained below the Federal Reserve’s two percent target, and there was slack in the job market. If anything, monetary policy “was too tight, not … too loose,” Kashkari said.

The Federal Reserve has implemented quantitative easing as a recovery measure in response to the COVID-19 pandemic. This policy involves the central bank purchasing mortgage-backed securities and Treasury bonds in order to lower interest rates and increase the money supply.

Kashkari said the Federal Reserve may taper its buying in the coming months in an effort to slow the housing market, but that decision will be based largely on developments with the delta variant and the job market.

In a time of government recovery spending, Kashkari drew a distinction between government borrowing he considers reasonable and borrowing of which he’s skeptical.

While Kashkari supports government borrowing to fund spending on investments with long-term return, such as infrastructure, he’s unsure of borrowing to fund health care, education and other benefits he considers closer to consumption.

“Longer term, the government needs to put its fiscal house in order and figure out, ‘How do we pay for these ongoing benefits, which are more like consumption?’ You can’t simply increase the deficit forever,” Kashkari said. “The U.S. government has a lot more capacity for debt than I think any of us appreciated five or ten years ago, but that doesn’t mean it’s unlimited.”

In October 2020, the Federal Reserve began hosting a series of talks on racism and the economy. Kashkari said he believes the program is important because racial disparities “affect almost every aspect of our economy, almost every aspect of our society.”

“We are long overdue for finally taking bold action to try to close these disparities,” Kashkari said. “It’s not only an issue of fairness and doing the right thing; it’s about helping our economy reach its full potential so we are not leaving behind people who want to contribute to our economy but today can’t.”

One step Kashkari has taken with former Minnesota Supreme Court Justice Alan Page to combat racial and socioeconomic disparities in Minnesota: a proposed state constitutional amendment to create a civil right for every child to get a quality public education.

“I continue to think the most powerful tool that we have to build a better life for people is giving them the best education possible,” Kashkari said.

Will COVID-19 change the way we work long term? Kashkari hopes so. GDP has fully recovered to pre-pandemic levels, but job numbers have not, which suggests to Kashkari that productivity increased following the widespread move to remote work and focus on the digital economy.

Guest:

• Neel Kashkari is the president of the Federal Reserve Bank of Minneapolis

Use the audio player above to listen to the full conversation.

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