Congress has given the Federal Reserve a dual mandate: pursue stable prices and achieve maximum employment. In pursuit of these goals, the Fed links these mandates to concrete economic measures. For “stable prices,” the Fed targets annual growth of prices of goods and services at 2 percent over the longer run. But “maximum employment” is more difficult to define, as no single statistic captures this part of the mandate.

So how does the Fed interpret maximum employment? In its “2020 Statement on Longer-Run Goals and Monetary Policy Strategy,” it explains that the maximum level of employment is “… a broad-based and inclusive goal that is not directly measurable and changes over time owing largely to nonmonetary factors that affect the structure and dynamics of the labor market. Consequently, it would not be appropriate to specify a fixed goal for employment; rather, the Committee’s policy decisions must be informed by assessments of the shortfalls of employment from its maximum level, recognizing that such assessments are necessarily uncertain and subject to revision. The Committee considers a wide range of indicators in making these assessments.”

When the economy is near or at maximum employment, the unemployment rate is also near or at its natural rate. The natural rate of unemployment (or u* for short) consistent with maximum employment is not zero, as there is always some unemployment in the economy from workers transitioning between jobs and spending time searching for a suitable match. In addition, similar to maximum employment, u* is time varying. Advances in search technology (such as online job ads), demographic shifts and even fiscal policy can affect the rate of unemployment considered natural.

Modeling the Natural Rate of Unemployment

Economists have tried to estimate u* using statistical models. The 2023 working paper “Estimating Natural Rates of Unemployment: A Primer” discusses one of these models.1 It consists of multiple equations linking the actual unemployment rate, the natural level of unemployment rate and the inflation rate to their respective recent historical values, as well as equations linking all these variables together. As u* is unobserved, it is estimated by the joint movements of the observed unemployment rate and inflation rate as well as other factors that can simultaneously affect the economy.

These models are useful in providing FOMC policymakers with a way to gauge if policy is too restrictive, too accommodative or just about right. But they also carry some drawbacks. Specifically, if there is no movement in the inflation rate, these models tend to assign most movements in actual unemployment to changes in u*.

The pandemic provides an example: At first, unemployment rose to 14 percent. Since there was no simultaneous decline in prices, these statistical models concluded that a rapid rise in u* must have taken place. (Otherwise, what could explain the lack of deflationary pressures?) Most would agree that such a rapid rise in the natural rate of unemployment in the beginning of the pandemic does not sound plausible.

An Alternative for Assessing Maximum Employment

In this article, I present a simpler alternative for assessing the maximum level of employment: labor market indicators that signal an economy close to full employment. The idea is to focus on what happens at the end of expansions. For example, the unemployment rate decreases during expansions and settles at a lower level. Is that level relatively similar at the end of each expansion? If so, can we consider it as a reasonable indicator for the state of maximum employment?

Since the nature of the business cycle has changed over the last 50 years, I analyze only the expansions after the last three recessions:

The expansion following the March 2001-November 2001 recession
The expansion following the December 2007-June 2009 recession
The expansion following the February 2020-April 2020 recession

One caveat with this approach is the different sample durations, as every expansion is interrupted at different durations by the next macroeconomic shock. Figure 1 shows the monthly unemployment rate following its peak for these three expansions. Unemployment peaked around 6 percent in 2001, around 10 percent in 2007 and around 15 percent in 2020.

A 2022 paper has already found that, prior to the pandemic, the unemployment rate tended to fall in a consistent manner after its peak.2 What is being examined here is the level at which unemployment converges at the end of each expansion. It turns out that unemployment converges within a relatively narrow range: 3.5 percent to 4.5 percent. Inside this “maximum employment” range, either unemployment stops decreasing or the pace of the decline becomes smaller, with both indicating an economy close to full employment.

One note is that this measure assesses maximum employment by relying only on historical unemployment data at the end of expansions. The measure does not rely on inflation data, unlike previously described methodologies. Thus, it is likely that our methodology detects an economy at its “maximum employment” state without any underlying inflationary pressures. This was the case with the end of the expansion following the Great Recession, where policymakers were puzzled by a labor market that looked close to full employment and an economy absent of any inflationary pressures.

Maximum Employment by Gender and Education

The analysis above shows that the overall unemployment rate converges within a relatively narrow range. But is this true for specific groups as well? Do more narrowly defined groups converge toward their maximum level together, or do some groups reach maximum employment first while others lag behind? In the 2020 Statement, the FOMC characterized maximum employment as a broad-based and inclusive goal. Thus, it is important to understand if some groups have more difficulty reaching maximum employment than others.

Figure 2 shows the unemployment rate separated by gender. As with Figure 1, it focuses on expansions after the last three recessionary episodes and plots the unemployment rates since their peaks.

The difference between the two groups occurs at the peak of the recession. For example, the Great Recession hit male-dominated sectors (such as construction) harder, which explains why the unemployment rate for males increased more. In contrast, the pandemic more heavily impacted sectors that traditionally employ larger shares of women (such as services). Still, both women and men tend to uniformly reach maximum employment by the end of the expansion.

The final part of the analysis decomposes unemployment rates into education groups:

Those without a high school degreeThose with a high school degreeThose with a college degree

Figure 3 shows the unemployment rates for each of these groups following the same three recessions.

Generally, the unemployment rate is lower for more educated workers, and it seems to reach a maximum employment state more quickly during expansions. In contrast, unemployment for less educated groups takes longer to decline. Thus, policymakers may want to pay special attention to the unemployment rate of less educated groups to assess if the goal of maximum employment has been achieved.

Conclusion

The Fed has been given the mandate of pursuing maximum employment. Evaluating if the economy has reached such a state is not straightforward. The Fed relies on multiple indicators and methodologies to infer how close the economy is to full employment.

In this article, I discuss one methodology that can guide policymakers: using the end of recent expansions. The unemployment rate behaves in a consistent manner along the ends of recent expansionary episodes, reaching a narrow range of 3.5 percent to 4.5 percent. This range can serve as a signal to policymakers to start considering normalizing monetary policy.

Marios Karabarbounis is a senior economist in the Research Department at the Federal Reserve Bank of Richmond.

To cite this Economic Brief, please use the following format: Karabarbounis, Marios. (August 2025) “How to Gauge Maximum Employment.” Federal Reserve Bank of Richmond Economic Brief, No. 25-32.

This article may be photocopied or reprinted in its entirety. Please credit the author, source, and the Federal Reserve Bank of Richmond and include the italicized statement below.

Views expressed in this article are those of the author and not necessarily those of the Federal Reserve Bank of Richmond or the Federal Reserve System.