Written by Steven Hansen
The Fed says we are at or near full employment – they have been saying it for over a year. The simple definition of full employment is where anyone who wants a job has one.
Please share this article – Go to very top of page, right hand side, for social media buttons.
The reason the Fed amongst others keeps their vision on full employment is if there are too many jobs and too few people looking for a job, inflation will rise as employers compete to hire workers and push up wages.
But when one considers what metrics should be used to determine full employment – the wheels begin to fall off of the cart. The Fed fell in love with the Beveridge Curve. From the BLS:
The Beveridge Curve is the economic model used to examine the inverse relationship between labor demand and labor supply over time. The curve plots the job openings rate with respect to the unemployment rate.
During an expansion, the job openings rate is high and the unemployment rate is low moving to points along the curve up and to the left. During a contraction, the job openings rate is low and the unemployment rate is high moving to points along the curve down and to the right. A shift in the Beveridge curve can indicate a structural shift in the economy due to industry-based structural mismatch and geography-based structural mismatch. For example, if the job openings rate and the unemployment rate are both high, this could shift the entire curve up and to the right.
From the start of the most recent recession in December 2007 through the end of 2009, the series trended lower and further to the right as the job openings rate declined and the unemployment rate rose.
Looking at the Beveridge Curve, it is hard to disagree that the USA is near full employment. But when one looks at real earnings – there is no sign of inflation grabbing hold. There must still be enough potential workers that employers can still be stingy with pay.
Here enters my usual concern with economic theory – there are billions of dynamics that affect employment – and the analysis to determine full employment was reduced to the relationship between job openings and unemployment. This is a generality, which should usually work – but may not work in all situations.
The labor participation rate – the estimated labor force divided by the population – has been relatively flat since the end of 2013 – whilst the employment-population ratios have recovered to the levels seen in the mid-1980s. A higher percentage of Americans are working than were 5-8 years ago.
But exactly who is working – here demographics come into play. One factor is more women are working more today (57% labor force participation) than when we were last at this overall level of particpation in 1984-85 (53% – 54% participation rate for women). This means that the particpation rate for men still has a lot of slack.
Another factor is old fogies (many of whom cannot or choose not to retire) are taking a historically high percentage of jobs.
Index of Employment Levels – 55 and up (blue line), 45 to 54 (red line), 35 to 44 (green line), 25 to 34 (purple line), 20 to 24 (light blue line), and 16 to 19 (orange line)
Are other demographic redistributions and dynamics contributing a potential labor pool not normally seen historically? There are 50 million Americans 65 and older who are potential workers – of which roughly 20 million are currently working.
All of these factors, including the fact that overall labor force participation is still 5 percentage points below peak give a strong indication that we are sveral million jobs away from a tightening labor market.
One more significant factor may be education. In the fall of 2017, some 20.4 million students attended American colleges and universities, constituting an increase of about 5.1 million since fall 2000. For a variety of reasons, a significant portion of the potential workforce has chosen education over employment. These students will be finishing education and entering the labor market in the coming years. On the other hand, many could have chosen further education because a job was not available.
Whilst all this is going on, one of the major employment industries – retail – is going through a major transformation of process and automation. Bring on the robots. Jobs for people are going away.
Employment in the USA is growing roughtly 2.5 million per year so the potential labor pool makes a big difference if analyzing full employment. I am no longer sure that it is possible to accurately estimate the potential workforce which makes determination of full employment problematic.
Other Economic News this Week:
The Econintersect Economic Index for March 2018 marginally improved but remains in territory associated with modest economic growth. Note that this index has been in a general down trend since July 2017. We remain concerned about the HISTORICALLY HIGH elevated spending to income ratios which paints a picture of a consumer spending all of its income – with little room for additional spending.
