It is often asserted that the U.S. labor market, where unemployment has been at or below 5 percent since late 2015, has reached full employment. But I’ve got three reasons we’re not yet quite there yet:
— the underemployment employment rate is still too high;
— employment rates are still too low;
— wage pressures are still too mild.
I’ll explain each in turn, but close readers of this column will recall that a few weeks ago, I argued cogently and convincingly (Objection! He’s leading the witness. Sustained. Let the reader decide who’s cogent and convincing) that no one knows the so-called natural rate of unemployment. That’s the lowest jobless rate consistent with stable prices, and if we don’t know that, then how do I know whether we are or are not at full employment?
That’s kind of my point! We need to look at a variety of related indicators and see what they say. My contention is that these three important ones are all saying there’s still some slack left in the national job market. (To state the obvious, there’s considerable variance among local labor markets; I’m talking about the aggregate.)
The technical name of the underemployment rate is u6 (see Table A-15 in the monthly employment report), and along with the unemployed, it includes a small group that’s not looking for work right now but wants a job, and a much larger group (5.8 million; almost 4 percent of employment) of part-time workers who’d rather be full-timers (ergo, they’re underemployed). Though highly correlated with the standard jobless rate, u6 has yet to come back down to what it should be at full employment.
How do I know? This is all guesswork, but as described here, I employed a simple statistical exercise to estimate what u6 should be at full employment and came up with an estimate of 8.5 percent. While there’s considerable uncertainty around that estimate, note that it’s around where u6 was at its low-point in the last expansion and considerably higher than u6 in the 1990s (see figure).
So, point No. 1: The underemployment rate, currently at 9.4 percent, is almost a full point above its rate at full employment.
Prime-age employment rates
It is widely recognized by labor market observers that the share of the population participating in the labor force remains well below — about 3 percentage points below — its pre-recessionary peak. But before we enter this fact into evidence of not being at full employment, we must recognize that part of that decline — and most economists argue it’s the lion’s share — is due to the retirement of aging boomers (as opposed to labor market slack).
But if we look at the employment rates (share of the population employed) of prime-age (25- to 54-year-old) workers, we take retirees out of the picture. However, with this group, we buy ourselves a different analytic challenge. For decades, as you see in the figure below, the prime-age employment rates for men have bounced around a negative trend (more recently, the rate for prime-age women has followed a similar trend). Given that trend, it’s hard to know what this rate should look like at full employment.
There is much debate about what’s behind the long-term negative trend. (I weigh in here.) But my point in the context of the are-we-at-full-employment question is in regard to the cycle, not the trend. That is, these guys have clawed back about two-thirds of their loss since the downturn (same for the women). That suggests they are responding to increased labor demand, as they have in past recoveries, and I can think of no reason that line can’t keep climbing. In fact, I’d argue that in the absence of obvious inflationary pressures, policymakers would be making a fateful mistake to think or act otherwise.
In this final figure, I mashed together five nominal (before accounting for inflation) wage and compensation series to get a bead on wage growth without depending on one wage series. The first key point is that after falling off a cliff in the Great Recession, the series flattened as the recovery took hold and only fairly recently started slowly rising to its current pace of around 2.5 percent.
Compare that recent trend to earlier recoveries in the picture and you’ll see that the current slope is not particularly steep while the growth rate itself is quite low in historical terms. These nuances are important. The fact that low unemployment is generating some wage pressure is both expected and positive, but the fact of nominal wage growth does not in and of itself imply full employment. As the first two indicators showed, there are still millions of workers who would like more hours of work and millions more on the sidelines who could perhaps be pulled into a welcoming job market. That extra slack is still modulating any building wage pressure.
Evaluating whether we’re at full employment is not like determining whether a glass is full of water. It’s a dynamic question, involving the interaction of many moving parts. Depending on the unemployment rate alone is a clear mistake. Nor does inflation answer the question. First, inflationary dynamics in recent years are not well understood, as price growth has been uniquely unresponsive to the usual variables. True, inflation, both actual and expected — have slightly accelerated in recent months, but that’s partly due to normalizing energy prices, which are set in global markets and thus have little bearing on the full employment question. The Fed continues to miss its 2 percent core inflation target on the downside and by a longshot.
The punchline is that working families depend on their paychecks, not their stock returns, and thanks to the tightening job market and the extra bargaining clout it delivers, those paychecks are finally starting to show a little bit of muscle (minimum wage increases are helping too). But while we’re closing in on full employment, we’re not there yet. That means steady as she goes at the Federal Reserve — feet off the interest rate brakes, please.
As for team Trump, unlike its predecessor, it inherited a solid labor market. My message would thus be: please try not to screw it up.