The slowdown in essentially all of these processes is seen in declining rates of creation and destruction of both firms and jobs.

Start-ups: Start-ups are a key driver of productivity growth. Although it may feel that we are living in an age of disruption, the birthrate of startups has actually been in decline since the 1970s. New firms can be loosely grouped into two categories: those started by "lifestyle entrepreneurs" who want to be their own boss, but who have little prospect or desire for high growth; and those founded by transformational entrepreneurs who start businesses that aspire to grow dramatically and change their industry. Before 2000, the decline in new firm entry was mainly in the first sort; since 2000, it is also found among the so-called transformational firms. While the drop in the formation of lifestyle-type firms could be neutral or even a positive for productivity, as in the case of the U.S. retail sector, the reduction in the creation of high-performance new firms suggests that lower dynamism could be associated with slower productivity growth.

Labor Market Dynamism: While changing jobs can be painful, job changes in the aggregate are associated with higher compensation, implying higher productivity. But the rewards to job change may have declined. Fewer start-ups has meant lower "job flows," as measured by job creation and destruction, and fewer opportunities for workers to find better jobs. And labor market dynamism across many dimensions has declined by more than can be explained by the reduction in startups. Workers have become less likely to leave their jobs, change jobs, or move geographically to take new jobs.

Dynamism is a relatively new field of inquiry, and there is no consensus yet on the reasons for, or implications of, these developments...

It may be that some government policies, while well intended, have contributed to these trends. One example that may explain a small portion of the reduction in dynamism is the substantial increase in occupational licensing. By some estimates, the fraction of workers who are required to hold a government issued license or certification to perform their jobs has risen from 5 percent in the 1950s to close to 40 percent. Like many policies, licensing has benefits and costs. Among the costs are that it tends to reduce job switching and employment opportunities for excluded workers, and may restrict competition and thus increase prices faced by consumers. Among the benefits may be higher quality products and services and improved health and safety standards. Some researchers have advanced the view that licensing requirements have become overly burdensome and may have contributed to the secular decline in job and worker reallocation.

Dynamism is a fast-developing field of research, and it will be important that public policy react appropriately as this work continues. It goes without saying that economic policymakers should use all available information and tools to create a supportive environment for growth. We need policies that support labor force participation and the development of skills, business hiring and investment, and productivity growth. For the most part, these policies are outside the remit of the Federal Reserve, but monetary policy can contribute by supporting a strong and durable expansion, in a context of price stability.

At this stage in the economic cycle, it is our updated view that job growth of between 60,000 to 120,000 per month will be necessary to keep the unemployment rate constant, depending on changes in the labor force participation rate.

The numbers that are released on the Labor Market Conditions Index don't refer to the level of the index, but rather the change, and the move that you have mentioned in that index suggests not that the labor market is not operating -- the labor market is operating at a good level according to the level of that index, which we do not publish. There is loss of momentum, that is what the negative numbers show, and we have seen the same thing in the recent job reports that I referred to in my testimony.

So, without a doubt, for the last several months, a number of different metrics suggest a loss of momentum, not a deterioration in the labor market, but a loss of momentum in terms of the pace of improvement. And that is an important consideration, as I mentioned. We believe that will turn around, expect it to turn around, but we are taking a cautious approach and watching very carefully to make sure that expectation is borne out before we proceed to raise interest rates further.

I think the May jobs report was, you know, a surprise to the downside, but I also think you need to look at the totality of the labor market evidence. Labor markets have been improving for a long time. Unemployment rate’s all the way down at 4.7 percent. This particular jobs number was not so great, but the other ones have been, you know, very good for a long time. So I think, when you look at the evidence all together, it’s still very strong on the labor market side.

Given that the labor market contrasts with the pattern in the first quarter, and the pick-up in spending observed so far from other data, it will be important to see whether the weakness in [the May employment] report is an anomaly or reflects a broader slowing in labor markets.

"There's some room for the participation rate to get a little better, but we think a lot of it is demographic," he said. "So, we're not at full employment, but we're getting pretty darn close."

The second approach [to Fed policy], which I’ve been a little bit more inclined towards, is to say, "Gee, you know, it’s not clear what full employment is, we’re in a global environment which is not inflationary, and we can perhaps get some more employment and some higher wages"... Are we at a point where there’s an affirmative reason to move?

"By nearly any metric, U.S. labor markets are at or beyond full employment," Bullard said.

Asked what sort of payroll number would justify a rate hike in June, he said: "I don't think I'd want to commit to a particular number. The labor market reports have many different aspects to them and you'd have to look at the totality of the report."

But he added that the general message from labor markets was that performance has been very strong.

"It would take a very dire report to undo all the charts that I showed you and say that the labor markets were not strong, all of a sudden," he said.

These labor markets are improving so rapidly that I think unemployment will be down below 5% in the second half of this year so if you're sitting around and you haven't even come off zero and the unemployment rate has come down below 5% that seems a little bit extreme to me.

BARTIROMO: Before we go in and looking back at what Janet Yellen said this week, let's look forward. We have a jobs number out next Friday. And, of course, we know that the unemployment story has been improving a bit. Where are the jobs in this country? Where is the growth in jobs from your standpoint?

WILLIAMS: Well, first of all, last year was remarkable. We added something like over 3 million jobs. So, we're in a really good place in terms of the improvement in the labor market that we've seen in the last year.

I expect this year -- we'd also see very good improvement in the labor market, continuing good momentum there. So, I think, you know, we still have a ways to go. Unemployment is 5.7 percent. We need to get closer to 5 percent to be at full employment. We made a lot of progress. And I think this is the year, we're going to reach full employment by the end of the year. That's my own forecast.

"What I want is data that gives me some confidence that inflation is moving back up" toward the Feds 2 percent goal, Powell said in a Monday interview in Washington with Peter Cook on Bloomberg Television.
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"Most of all, wages have been low," he said. "Wages do not suggest any tightness in the labor market yet. Those things tend to indicate that the natural rate of unemployment might be lower than its estimated to be."

There is a great deal of uncertainty about the resulting path of the unemployment rate, with some forecasters expecting a fairly steep decline to around 5 percent by the end of 2015, while others anticipate a much more gradual decline.

If one assumes that the unemployment rate will continue to fall at the same pace in 2016 as it is expected to fall in 2015, both forecasts would reach the Boston Fed’s 5.25 percent estimate of full employment around the middle of 2016. As I’ve said on many occasions, I personally do not expect that it will be appropriate to raise short-term rates until the U.S. economy is within one year of both achieving full employment and returning to within a narrow band around 2 percent inflation. Again, that is my personal view. And, if one were to also assume that tightening would begin roughly one year before reaching full employment and the 2 percent inflation target, then one could say that the primary dealers’ estimates of a rate rise bunched around mid-2015 seem roughly consistent with the forecasts for unemployment in Figure 2.

Figure 6 shows how states look when plotted in terms of the U-3 rate (the horizontal position) and workers part-time for economic reasons (the vertical position), both compared to a pre-recession average (calculated from 2005 to 2007). A large number of states are clustered in the upper right hand quadrant of the figure, indicating that both U-3 unemployment and those who are part-time for economic reasons remain well above levels from before the recession. There is also a clear trend in the data, where states with U-3 unemployment well above that pre-recession average tend to have higher part-time workers relative to pre-recession levels. I would also point out that many of the states that have very high U-3 unemployment and workers part-time for economic reasons are states that were disproportionately impacted by the financial crisis (states such as Arizona, Nevada, and Florida).

Yet the labor market’s journey is not yet complete – more progress needs to be made. My outlook is that as the expansion continues, firms will continue to add to their payrolls and the unemployment rate will continue to decline. I expect that by the end of next year, the unemployment rate will fall to around 5½ percent, which is what I view as the “natural rate,” or longer-run rate, of unemployment.

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Putting all of this together, I expect growth over the next six quarters to be somewhat above my estimate of trend growth, which I put at around 2.5 percent. Of course, there is always a good deal of uncertainty around estimates of trend growth, perhaps even more so today in the aftermath of such a deep recession. I am a bit more optimistic than some about longer-run growth because while productivity growth has been running low, I think it is good to remember the experience of the 1990s. Back then, over a period of several years, many forecasters revised down trend growth estimates only to subsequently revise them up significantly in response to strong productivity growth.

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One might ask whether that’s a reasonable inflation forecast given that we haven’t seen much acceleration in wages yet. I believe it is. Cleveland Fed analysis, based on several measures of wages and broader compensation, indicates that it is difficult to find a lead-lag relationship between wages and prices – the strongest correlations are contemporaneous ones, especially since the mid-1980s. We should expect wages to rise with prices, not necessarily lead prices. In my view, it would not be prudent for policymakers to simply wait for wages to accelerate before assessing the implications of the stance of monetary policy for future price inflation. Indeed, policymakers must always be forward looking.