Next week, Federal Reserve officials publish new quarterlyforecasts, and all eyes are going to be on where they set the jobmarket's Goldilocks rate.

That's the estimated unemployment level officials figure isneither too high nor so low that it starts to drive wages andprices higher. To quote Goldilocks, it's “just right.”

Fed officials in March estimated this “natural rate” ofunemployment at 5 percent to 5.2 percent. Unemployment stoodat 5.5 percent in May. A new paper by Fed board staff shakes upthis view by suggesting the number could be as low as 4.3percent.

That has implications for next week's Fed policy meeting. If FedBoard economists Andrew Figura and David Ratner are right, thelabor market has room to run. So there may be no need to raiseinterest rates soon, or fast.

Figura and Ratner look at the question of where the fullemployment rate might be through the lens of laborcompensation.

One standout feature of the recovery is that labor's share ofthe money made from production and imports is still moving sidewaysaround the lowest levels in records dating to 1947.

If the reason for that is weak bargaining power, then firms canadd more jobs and drive down the unemployment rate without muchwage pressure. In fact, if the share of cash going to labor versuscapital isn't changing much, it's an incentive for firms to postjob vacancies as demand rises.

If a firm sees that hiring one more worker adds another $10 insales, and the share between labor and owners stays relativelyunchanged at $4 for the firm and $6 for workers, then “I am goingto want to post more vacancies and add more people,” said MichaelGapen, chief U.S. economist at Barclays in New York.

At least two things give the research weight. First, it tells astory that fits well with current data.

• Average hourly earnings for production and non-supervisoryworkers have averaged 2.1 percent growth since this expansion beganin June 2009, a percentage point below the last expansion.
• Inflation, minus food and energy, remains low at 1.2 percent bythe Fed's preferred measure.
• Job vacancies rose the most in April in data going back toDecember 2000.

Second, Fed Governor Lael Brainard cited the research in a June2 speech where she made the case that “there are reasonsto think that the natural rate may have declined over the past fewyears such that a gap remains between the unemployment rate and itsnatural rate.”

Even if Fed officials do raise the benchmark lending rate inSeptember, as about half the economists in a Bloomberg News surveythis month expect, the research suggests the pace of tighteningwill be slow.

“It could mean that one percentage point of tightening per yearis too steep in a world where” the rate of full employment is 4.25percent, Gapen said.

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