Tuesday, September 25, 2018

How close are we to full employment? September update

 -  by New Deal democrat

A couple of months ago, I estimated that we were about 0.8% away from "full employment." Theoretically, that should be when everyone who wants a job has one, but more realistically, the benchmark would be peak employment from the last few cycles.

We've had a couple more good employment reports since then, so where are we? In the below graphs, I'm going to compare our situation with the best situation in the last 50 years: the tech boom of 1999-2000.

First off, the primary difference between the U3 unemployment rate and the U6 underemployment rate is people who are working part time but would like a full time job.  At its best in 1999, 2.2% of the labor force were in this condition, so I've subtracted that in the graph below:

Notice that despite the big drop in the last couple of months, at the far right, we are still slightly above 2007 levels, and a little more above 1999 levels. Here is the close-up:

Currently the level of involuntary part-times is about 0.5% above its 1999 bottom.

Next, above the underemployment level are those who aren't even looking for a job, and so aren't counted in the labor force at all, but say they want a job now. This is roughly 5 million people. Even at its best level in 1999, when we include these people as well, and add them into the labor force, it totaled 9.8%, so that level is subtracted in the below graph:

Again, currently we are about 0.8% above the 1999 "full employment" level.

Put these two together, and we can calculate that if about 750,000 involuntary part-timers were to get full time jobs, and another 1.2 million people who aren't even in the labor force got jobs now, we would equal the best level of the "enhanced underemployment rate" 1999. That's one good estimate of how close we are to "full employment."

Notice that is the same level I caluclated two months ago.that's because, despite the progress on *under*employment, there's been no progress at all on those who are not in the labor force but want a job now (in fact that number has risen slightly since March). 

But now, let's look at the prime age employment population ratio:

Even if we added the 0.8% of people who want a job now, and the underemployed 0.5% got full time jobs, that would just put us at the levels of the 1989 and 2007 peaks. The level would still be roughly 1.5% below the 1999 peak.

This 1.5% comes from the population who aren't in the labor force, and indicate that they *don't* want a job now. Mainly these people are disabled, or raising children at home, or younger people who are in school. But, especially among the first two groups, if wages were higher, some would decide it was financially advantageous to join the labor force.

As I said yesterday, the signature of our current economy is the dual extremes of very low unemployment, and very low wage growth, and I did not think that was a coincidence. If wages were higher, some of those 1.5% out of the labor force would enter it, and not all would find jobs, meaning that the unemployment rate would be higher.