The link between participation rates and monetary policy in the United States

The following concern is sometimes heard: if the participation rate in the United States falls (if workers have left the labour market and are not returning), the resulting pressure on the labour market will lead to faster wage increases, higher inflation and higher interest rates. But it is important to understand the Federal Reserve’s objectives in the contemporary period: to drive up the employment rate through an “overheating policy,” i.e. by continuing to stimulate demand to bring back into the labour market people who have left it, and to encourage companies to hire low-skilled people. As a result, if the participation rate falls after a crisis, monetary policy will remain even more expansionary to restore it, and will not become restrictive at all because of companies’ hiring difficulties.