Jobs Versus Inflation
The U.S. recovery is putting people back to work and the growing economy is on its way to restoring full employment. Please go easy on the champagne. When economists talk about full employment, they don’t mean everybody has a job. They don’t mean that even the rosiest economic health can cut unemployment to zero. If unemployment falls too much, inflation will rise as employers compete to hire workers and push up wages too fast. Full employment means that unemployment has fallen to the lowest possible level without provoking inflation. The mystery is what that level might be. In the U.S., according to prevailing estimates, it’s a jobless rate of about 5 percent — above the November rate of 4.6 percent. But the consensus is shaky and there’s a lot resting on a debate about how much further, if at all, unemployment can fall without causing inflation to take off.
Since the U.S. recovery began in 2009, total employment rose from 138 million to almost 150 million at the end of 2015. The number of unemployed had shrunk to fewer than 8 million from 15 million. As the labor market tightens, the Federal Reserve is debating the timing for rate hikes. The problem is that there’s more uncertainty than usual over how many people want jobs, making it hard to pinpoint how much unemployment has to be tolerated to fend off inflation. That’s because the recent recession was exceptionally severe and has shaken up the labor market in ways that aren’t well understood. The economy might be further away from full employment than the main official measure of unemployment suggests.
The government counts as unemployed people who don’t have a job, have “actively looked” for one in the previous four weeks, and are available for work. A wider measure of people needing work would count other potential job-seekers as well. The Bureau of Labor Statistics reports that 1.8 million people were “marginally attached to the labor force” at the end of 2015 — meaning they wanted a job and had looked for one in the previous 12 months, but not in the past four weeks. This included 663,000 “discouraged workers” who had stopped looking because they thought there were no openings. The number of marginally attached had swelled partly because the recession was so deep and long; it’s likely to shrink as the recovery continues. Other kinds of disguised unemployment may be temporarily high as well. At the end of 2015, 6 million of the economy’s 26.3 million part-time workers wanted a full-time job. A stronger economy might also draw back into the labor force people who retired sooner than they’d intended, or who chose to stop working for other reasons.
Economists, including the Fed’s policy makers, are divided about how close the economy is to full employment. Some think that short-term interest rates should rise soon to discourage inflation. Others think that rates should be held at zero for longer, not least because inflation is still below the Fed’s target. Some economists think that the official rate of unemployment can fall much further — say, to 4 percent — before inflation concerns need to be addressed. Others say that changes in wages may be a clearer indicator of labor-market conditions than the post-crash unemployment rate. Wages are finally showing tentative signs of faster growth. Wal-Mart and McDonald’s raised pay and the Federal Reserve has noted “increased wages to attract skilled workers for difficult-to-fill positions.”
The Reference Shelf
- The Bureau of Labor Statistics has all the data.
- A paper by economists at the San Francisco Fed asks why wages have grown so slowly.
- A Fed working paper on the rise in involuntary part-time work.
- Laurence Ball and Gregory Mankiw survey the non-accelerating- inflation rate of unemployment, or NAIRU, in theory and practice.
- A Bloomberg graphic: “Yellen’s Labor Market Dashboard.”
First published Feb. 5, 2015
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