janet l yellen : labor market dynamics and monetary policy speech by ms janet l yellen, chair of the board of governors of the federal reserve system, at the federal reserve bank of kansas city economic symposium, jackson hole, wyoming, 22 august 2014. * * * in the five years since the end of the great recession, the economy has made considerable progress in recovering from the largest and most sustained loss of employment in the united states since the great depression. 1 more jobs have now been created in the recovery than were lost in the downturn, with payroll employment in may of this year finally exceeding the previous peak in january 2008. job gains in 2014 have averaged 230, 000 a month, up from the 190, 000 a month pace during the preceding two years. the unemployment rate, at 6. 2 percent in july, has declined nearly 4 percentage points from its late 2009 peak. over the past year, the unemployment rate has fallen considerably, and at a surprisingly rapid pace. these developments are encouraging, but it speaks to the depth of the damage that, five years after the end of the recession, the labor market has yet to fully recover. the federal reserve ’ s monetary policy objective is to foster maximum employment and price stability. in this regard, a key challenge is to assess just how far the economy now stands from the attainment of its maximum employment goal. judgments concerning the size of that gap are complicated by ongoing shifts in the structure of the labor market and the possibility that the severe recession caused persistent changes in the labor market ’ s functioning. these and other questions about the labor market are central to the conduct of monetary policy, so i am pleased that the organizers of this year ’ s symposium chose labor market dynamics as its theme. my colleagues on the federal open market committee ( fomc ) and i look to the presentations and discussions over the next two days for insights into possible changes that are affecting the labor market. i expect, however, that our understanding of labor market developments and their potential implications for inflation will remain far from perfect. as a consequence, monetary policy ultimately must be conducted in a pragmatic manner that relies not on any particular indicator or model, but instead reflects an ongoing assessment of a wide range of information in the context of our ever - evolving understanding of the economy. the labor market recovery and monetary policy in my remarks this morning, i will review a number of developments related to the functioning of the labor market that have made it more difficult to judge the

” – namely, an inability or unwillingness on the part of firms to cut nominal wages. to the extent that firms faced limits in reducing real and nominal wages when the labor market was exceptionally weak, they may find that now they do not need to raise wages to attract qualified workers. as a result, wages might rise relatively slowly as the labor market strengthens. if pent - up wage deflation for an analysis documenting declines in the rates of hiring, layoffs, and quits, along with lower job creation and destruction, see steven j. davis, r. jason faberman, and john haltiwanger ( 2012 ), “ labor market flows in the cross section and over time ”, journal of monetary economics, vol. 59 ( january ), pp. 1 – 18. for a review of a range of evidence and possible explanations, see henry r. hyatt and james r. spletzer ( 2013 ), “ the recent decline in employment dynamics ( pdf ) ”, iza discussion paper series 7231 ( bonn, germany : institute for the study of labor ( iza ), february ). these authors suggest that much additional work is needed to understand the role of different factors in changes in labor market dynamism. for an analysis that raises the possibility that some of these shifts reflect better job matches, see raven molloy, christopher l. smith, and abigail k. wozniak ( 2014 ), “ declining migration within the u. s. : the role of the labor market ”, nber working paper series 20065 ( cambridge, mass. : national bureau of economic research, april ). among the indicators in the “ labor market conditions index ” are the labor force participation rate, workers classified as part time for economic reasons, hires, and quits. the index does not include the jolts job openings series but instead uses the board staff ’ s composite help - wanted index, which has a longer history ; the two measures generally track each other closely. see hess chung, bruce fallick, christopher nekarda, and david ratner ( 2014 ), “ assessing the change in labor market conditions ”, feds notes ( washington : board of governors of the federal reserve system, may 22 ). for a closely related index of labor market conditions, see craig s. hakkio and jonathan l. willis ( 2013 ), “ assessing labor market conditions : the level of activity and the speed of improvement ( pdf )