For much of the post–World War II era, full employment was not just an aspiration—it was a reality that fostered an era of high productivity, strong wage growth, and shared prosperity. However, this commitment—and the economy-wide benefits it generated—waned after 1980, with macroeconomic policy prioritizing low inflation long after restoring price stability. The consequences of accepting excessive unemployment were profound: wasted economic potential, rising inequality, and a growing disconnect between economic growth and workers’ living standards. It wasn’t until the past decade that the country regained its footing, driven by a deliberate shift in both monetary and fiscal policies.

Understanding this shift away from prioritizing full employment and back—and its implications—is critical as we navigate the economic and political challenges of the present and future. With notable interruptions, recent experience has seen us at or near full employment, offering a rare opportunity to rebuild the economy in ways that prioritize fairness, resilience, and prosperity—if policymakers fully embrace the lessons of recent years.

The Lost Years and the Road Back

Between 1949 and 1979, America rarely fell short of full employment, as policymakers made it a central economic priority. Unemployment remained below estimates of the non-accelerating inflation rate of unemployment (NAIRU) for much of that time, underscoring a policy consensus in favor of maximizing employment. From 1980 onward, the focus shifted away from this goal, as inflation dominated policymaking—even during times actual inflation was below the Fed’s target—and sidelined the broader societal benefits of tight labor markets even as policymakers presumed them. The share of time spent at or near full employment plummeted, with unemployment often exceeding NAIRU by wide margins.

The societal consequences of this shift were stark. Prolonged periods of labor market slack stifled real wage growth, particularly for low- and middle-income workers, and exacerbated inequality.¹ The recovery from the Great Recession offers a particularly grim example: Insufficient fiscal support and overly cautious monetary policy drove a slow recovery that left key labor market indicators—such as the prime-age employment rate—below pre-crisis levels for more than a decade. For many workers, especially those entering the labor market during the recession, the scars of slow recovery lingered in the form of lower lifetime earnings and poorer health outcomes.²

The labor market resurgence starting in the late 2010s marked a turning point. Against expectations, the Federal Reserve allowed unemployment to fall below traditional estimates of NAIRU, even as fiscal policies such as the 2017 Tax Cuts and Jobs Act added stimulus to a strong economy. Against predictions, fiscal support bolstered demand without triggering runaway inflation. Even the COVID-19 pandemic, a seismic economic shock, did not derail this progress, because policymakers prioritized full employment. Aggressive fiscal measures—including direct payments to households and expanded unemployment benefits under both the Trump and Biden administrations—supported a remarkable recovery. By mid-2022, employment levels had fully rebounded, and unemployment returned to historic lows.

The Case for Full Employment

The economic and social benefits of full employment are immense and multifaceted. Beyond making jobs more plentiful, low unemployment increases workers’ leverage in the market—pushing up wages, improving job conditions, and reshaping the quality of jobs. This dynamic was particularly evident in the recovery from the pandemic recession. COVID-related job losses were so deep that many feared prolonged stagnation. Instead, the recovery saw robust wage growth, especially for workers at the bottom of the pay scale. By 2023, real wages for low- and middle-income workers had risen, even amid global inflationary pressures. These gains partly reversed decades of widening inequality and underscored the power of tight labor markets to promote economic fairness.³

The benefits extend beyond wages. Research shows that labor market tightness helps prevent long-term economic scarring.⁴ Workers who first enter the labor market during periods of high unemployment suffer lower lifetime earnings and poorer health outcomes. 

The labor market improvements of recent years underscore the vital role of macroeconomic policy in shaping economic outcomes. For decades, wage stagnation and inequality were treated as inevitable outcomes of impersonal forces like globalization and technological change. While these factors are important, recent experience shows that policy choices—especially those related to monetary and fiscal stimulus—play a central role in determining whether workers share in economic gains. The renewed wage growth of recent years was not a fluke; it was the product of deliberate macroeconomic policy decisions that prioritized labor market tightness over unfounded fears of inflation.

Lessons from the Pandemic and Beyond

The COVID-19 pandemic highlighted both the challenges and the potential of economic policymaking. The American fiscal response was extraordinary in scale and ambition. While some critics argue that these measures were overly expansive, hindsight shows that inflation during 2021–22 was driven more by global supply constraints than by domestic demand. As supply bottlenecks eased, inflation fell sharply without significant increases in unemployment—a phenomenon economists have called “immaculate disinflation.” 

Yet wage growth during this period was strongest at the bottom of the distribution, marking a historic compression of wage inequality, and has continued at higher rates even after inflation eased. Contrary to expectations, low-wage workers saw their real earnings rise even as inflation surged. This “great reshuffling” of the labor market, driven by higher quit rates and increased job-to-job transitions, demonstrated how tight labor markets can function better through greater competition, empowering workers to move from low-paying jobs to better opportunities. By reallocating workers to more productive roles, tight labor market conditions also boost productivity and overall economic growth, creating a “double dividend”: higher wages and greater economic efficiency. 

While the pandemic-era inflation was painful—especially for households already struggling to make ends meet—the unique supply-side constraints that fueled it are unlikely to recur in future downturns. To be clear, self-inflicted harm to both price stability and employment through a global trade war remains a risk. However, policymakers can continue prioritizing full employment, especially in response to recessions, without undue fear of triggering runaway inflation. While policymakers should be mindful of balancing stimulus to avoid overextending the economy, the lessons of the Great Recession are instructive here: An inadequate response can lead to prolonged and unnecessary suffering that permanently lowers economic output.

The Path Forward

America now stands at a pivotal moment. The challenge is not just to maintain low unemployment but to institutionalize the lessons of recent years into a durable policy framework. This will require resisting the temptation to tighten monetary or fiscal policy prematurely, particularly in response to speculative fears of inflation. Policymakers must also recognize that costs of labor market slack are not evenly distributed. Low- and middle-income workers stand to gain the most, making labor market equity a central goal of economic policy.

Recent history is clear: Choices, not inevitabilities, shape economic outcomes. America has spent more time at or near full employment during the past ten years than at any point in the past four decades. This is not a victory to forget. By committing to policies that foster tight labor markets, we can build a more prosperous, inclusive, and equitable economy for all.