Intersection: the Job Market, Wages, and Inflation

How much slack is left in the job market? Or in layman's terms: how many unemployed people are available to take jobs if they were to appear? "Slack," so defined, is important to Economists because "many at the Fed, believe lots of slack helps hold down inflation pressures. If the amount of slack is smaller than they think, or shrinking faster than they think, inflation pressures may start building before they know." Basically think of it in terms of Econ 110: when there is little supply (little slack in the labor market) prices rise if demand is constant. Basically, wages will begin to rise quicker if the there is little slack. This relationship illuminates why the Fed cares about wages and labor-market conditions.

This article summarizes new research showing that short-term interest rates need to be adjusted based on short-duration unemployment, not long-term unemployment as Chairwoman Yellen is wont to mention. Do you think the long-term unemployed should remain the focus of Fed policy, or should the Fed adjust its decision-making process?

http://blogs.wsj.com/economics/2014/02/12/the-best-gauge-of-the-labor-market/