White House Office of Management and Budget Director Mick Mulvaney defended the projection of unemployment rates in the administration's 2018 budget proposal on May 23, amid criticism of their assumptions about future economic performance. (Reuters)

The Trump administration’s new budget relies on some pretty fantastic growth assumptions. To keep the budget balanced, as the administration has promised, the U.S. economy would need to accelerate to 3 percent annual growth in the next few years -- more than 50 percent higher than the estimates of the Federal Reserve and the Congressional Budget Office, which both expect growth below 2 percent.

So where will that missing growth come from? In a news conference Tuesday, budget director Mick Mulvaney floated one source of growth: pulling some of the people who have been stuck on the sidelines of the economy back into the labor force.

When pressed on the question, Mulvaney explained that the difference between the traditional unemployment rate (known as the U3 rate) and the government's broadest measure of unemployment, the U6 rate, is more than 6 million people. That represents a significant source of untapped potential, he argued.

Unlike the U3 rate, which counts only those who don’t have a job but have actively looked for work in the past four weeks, the U6 rate includes those who have looked for work unsuccessfully sometime in the past year, as well as people who are working part time but would like to be full time.

“That difference, that delta is over 6 million people,” Mulvaney said. “So we believe that we should be able to drive U3 and U6 together and get those folks into full-time employment. And that's one of the ways you get productivity gains.”


Mulvaney also said that, with the right policies, the pool of unemployed and underemployed people that make up the difference between the two rates might eventually disappear entirely. When asked if the U6 measure could shrink to equal the U3, he said, “In a properly functioning economy, that would be the case.”

The government could probably generate some growth by ushering more Americans back into full-time employment and chipping away at that U6 rate — and this is an important problem to address, especially now that overall unemployment is pretty low.

It's fair to ask how much growth this process could generate. But unfortunately, when you dig into the numbers, it appears to fall very short of the kind of growth Mulvaney discussed.

Just look at the overall figures. There are about 160 million Americans in the labor force, who together generate GDP growth of just under 2 percent. How much can another 6 million people do to raise the growth rate another 50 percent?

“The math just doesn’t add up,” said Scott Anderson, chief economist at Bank of the West Economics.

As Josh Feinman, chief global economist at Deutsche Asset Management, points out, it’s highly unlikely the Trump administration can move all of those 6 million people into the labor force, anyway — for the same reason that it can never fully empty the ranks of the unemployed.

“Even in a really strong labor market — just firing on all cylinders, white hot — why is the unemployment rate at 3 percent? The reason is you’ve got frictional unemployment,” he said. “There are jobs that people don’t know about. They might be in a different part of the country, or maybe they have a different skill set. So even in a labor market that’s, as I said, running flat out, the [U3] unemployment rate is not going to be zero.”

The gap between the U6 and U3 rate has narrowed at various points in history, but it’s never closed completely, Anderson points out.

The chart below shows the difference between the two unemployment measures. Since the government started calculating the U6 rate in 1994, the smallest the gap has been was in October 2000, when the difference was just 2.9 percentage points. As of April, it was 4.2 percentage points — basically back to levels seen before the financial crisis, and below its historical average of 4.7 percentage points.


“Yeah, you can narrow it, but really the ability to completely close that gap is pretty unrealistic. It always seems to be a 3 percentage point gap, historically, even in a strong economy,” said Anderson.

There are other issues, Feinman says. First, moving these people out of the ranks of the marginally attached or involuntary part-time and into the full-time labor force will provide a one-time boost to growth — but it won't expand the labor force for a sustained period of time, like the 10-year window of Trump's budget.

And even if you get those people into full-time work, about 75 percent of the U6 population is workers who are involuntarily working part time, rather than not working at all. That is to say, their economic activity will expand some as they gain more hours but not as much as a full-time job each. And there may be reasons that some of these people are only employed part time — like a lower skill level.

“There’s less juice, a lot less juice, than what Mulvaney is saying. That doesn’t mean there’s no juice,” said Feinman. “There may be a little bit of scope to draw people back into the labor force. But you’re not going to get the U6 down to the U3. That would be as incredible as getting the U3 down to zero.”

This whole debate is just one small aspect of a looming problem — that the growth of America's labor force has slowed significantly, as the massive baby-boom generation begins to retire. That's important because, along with productivity growth, the expansion of the workforce is the main determinant of how much the economy can grow.

In his remarks Tuesday, Mulvaney mentioned that the economy had often grown in the past at rates of 3 percent and called people's objections to the Trump administration's expectation of growth rates that high "absurd."

“It used to be normal. Ten years ago, it was normal. In fact, it's been normal for the history of the country,” said Mulvaney.


Scott Anderson, Bank of the West

That's roughly true, as the chart above shows. But even 10 years ago, the country's productivity and labor force growth were significantly higher.

And the fast growth of the whole post-World War II period, when women were joining the labor force and the baby boomers were working, appears to be the aberration. So perhaps we have just arrived at a new normal.

See also: 

The worst thing poor whites are inheriting could be a lack of hope

You’re not getting a raise and nobody knows why

History suggests there is a way to lower inequality. But you’re not going to like it