Mounting Full-Time Employment Shows Less Slack for Yellen's Fed

  • One million fewer involuntary part-time workers last 12 months
  • From A to `Z-Pop' -- underemployment is gradually diminishing

At GoodWorld, almost half of the one-year-old start-up’s 15 employees have transitioned from part-time to full-time work. That’s just the kind of progress Janet Yellen wants to see.

“They kind of evolved into full-time employees” as the company began to grow with the help of a strengthening economy, said John Gossart, co-founder and chief operating officer. GoodWorld, which enables Facebook and Twitter users to give directly to charities by typing #donate, has raised $1.7 million to propel its expansion effort.

GoodWorld’s experience is one example of an accelerating trend: Fewer people are having to settle for less than a full workday. The improving prospects are reducing one of the last vestiges of U.S. labor-market slack as Federal Reserve Chair Yellen and her colleagues debate whether the economy is strong enough to warrant higher interest rates.

The number of Americans working part-time for reasons related to the economy dropped by 447,000 in September from the prior month to 6.04 million, the fewest since August 2008, according to figures from the Labor Department. The level has dropped by a little more than 1 million over the past 12 months.

“It’s one of many signals, and obviously one of the more optimistic of late,” said Guy Lebas, managing director at Janney Montgomery Scott LLC in Philadelphia. “There’s good evidence to suggest that labor markets are relatively tight right now.”

The underemployment rate, which captures these involuntary part-time workers along with discouraged workers who have stopped looking for a job, fell in September to a more than seven-year low of 10 percent from 10.3 percent in August. The rate has dropped by 1.7 percentage points over the past 12 months.

The improvement has been even more dramatic than that of the traditional jobless rate, which doesn’t include those who have left the labor force because the prospects of finding a job were dim. That rate held at 5.1 percent last month and was down 0.8 point from September 2014.

While the decrease in underemployment has been marked, the rate is still well above the 8.8 percent averaged in the four years leading up to the recession that began in December 2007. By contrast, the jobless rate almost matches the 5 percent average over the same time period and is close to the level that most Fed officials view as its long-term trend.

In a Sept. 24 speech prior to the release of the latest employment data, Yellen signaled her intention to try to temporarily push unemployment modestly below its long-run rate in order to pull discouraged workers back into the labor force and convince companies to turn more part-time jobs into full-time ones.

Yellen and the Fed continue to put “a lot of emphasis” on part-time for economic reasons as a measure of slack, said Omair Sharif, rates sales strategist at SG Americas Securities LLC in New York. “We’re not quite there yet, but they have to be encouraged by the amount of improvement we’ve seen.”

The Federal Reserve Bank of Atlanta has put together a gauge that attempts to better estimate sluggishness in the labor market. The so-called Z-Pop ratio measures the share of the working-age population putting in full-time hours, working less than a full week by choice or not wanting to work at all.

The share of people who are content with their labor market status is on the rise, in part because of the decline in involuntary part-time work. About 92 percent were fully utilized or satisfied with their employment status in September. The remaining 8 percent were counted as under-utilized.

The ratio is “consistent with a tightening labor market,” John Robertson, an Atlanta Fed economist who’s worked on the project, said in an e-mail.

The Z-Pop ratio is closer to pre-recession levels than other measures, including the share of the working-age population with jobs, and also shows more marked improvement in recent months.

Gauges such as the employment-population ratio are being damped by the exodus from the workforce of retiring baby boomers, which is less related to the state of the economy.

Slack “is hard to estimate but it still exists,” Dennis Lockhart, president of the Atlanta Fed, told reporters on Oct. 12. “But we are getting much closer to the finish line from the point of view of whatever you would consider full employment. I would expect to continue to make progress.”

Recent Figures

The last jobs report raised concern that the labor-market’s progress was starting to abate. Employers added a combined 278,000 jobs in August and September, the weakest two months of payroll growth since December 2013-January 2014.

Even so, the Fed is really looking at the level of overall activity compared to the past, Neil Dutta, head of U.S. economics at Renaissance Macro Research LLC in New York, said in an e-mail. The signals to watch may be the increase in transitions to full-time work that are pushing the Z-Pop ratio higher and the underemployment rate lower.

“Market participants have been conditioned -- somewhat wrongly -- to interpret the data on the basis of momentum when it is the level that really matters,” Dutta wrote. “The real question is whether the momentum is strong enough to push the level of activity higher; I think it still is.”

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