It only took seven years, but the economy is almost back to normal.
Emphasis on the word "almost." Unemployment, long-term unemployment, and shadow unemployment aren't, as Fed Chair Janet Yellen told Congress on Tuesday, all the way back to where they were before the crisis, but they're getting close. Even better, people are feeling a little more confident about quitting their jobs. Put it all together, and wages should start rising more soon, from the anemic 2.2 percent they are now to the 3.5 to 4 percent they should be.
Well, maybe. It depends on how much shadow unemployment is left. That's everyone who's not officially "unemployed"—not working, but actively looking for a job—but basically is. That includes people who have part-time gigs but can't find the full-time ones they want or have given up looking for now, but will start again once things look better. It's hard to get a handle on how big a problem this is, but one of the better measures is the labor force participation rate. It tells us the percent of people who have or are looking for a job. And it's not normal. It's at a 35-year low.
Now a lot of this was inevitable. The participation rate was always going to fall when the Baby Boomers started retiring. The crisis, though, has made it fall even more than that—but just how much is hard to say. The White House, as you can see above, calculates that about half the decline is due to aging, which is in line with other estimates. Another chunk is due to the crisis. And the rest is unexplained. (That's the blue part of the graph). It could be that people went back to school to wait out the recession. Or that people went on disability when it didn't look like any amount of waiting would be enough. Or that the long-term unemployed became unemployable. In any case, the question is how many of these people are coming back—and how we even tell if they do?
That's not as obvious as it sounds, well, at least not necessarily so. In a perfect world, all these discouraged workers would return, and the labor force would start expanding. But what about in the real world? That's a little more complicated. Some of them have come back, some of them will, but some of them are gone forever. It's important to remember, though, that this whole time the Boomers have still been retiring, and in greater numbers than before. So if none of the shadow unemployed were coming back, the labor force would be shrinking right now. That's why, as economist Scott Sumner argues, the labor force participation rate really is recovering even though it's not going up: returnees are exactly balancing out retirees. It's not as much of a recovery as we'd like, but a flat participation rate is still one.
How long will it last? Well, at least until wages start rising more—which already might be happening. Think about it like this. Workers don't have much leverage to get raises when there are so many shadow unemployed, so the fact that they might be getting more raises now means that there might not be that many shadow unemployed left. And that's the paradox of the recovery. The economy's biggest problem is that workers' wages have fallen, in inflation-adjusted terms, for 15 years now, but we kind of don't want that to change right now. If it did, that would mean the Great Recession had pushed millions of people into early retirement. It'd be better if more of those people came back, and then wages started rising again.
That's the best way to tell that the economy still has a ways to go before it's back to normal. Higher wages should never be bad news in any sense.