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Friday’s jobs report provided further evidence of the economy’s strength, with employment up 200,000 in January and the conventional unemployment rate holding at 4.1%. Without question, the economy is humming right along, yet after so many years we still ask, “Are we there yet?” This raises the follow-on question, “How will we know when we’ve reached full employment?”
To have failed to reach full employment after almost nine years of growth is extraordinary. This is not how the American economy normally works. Recessions happen, sometimes bad recessions. Businesses and workers adjust, pick themselves up, and after a couple years or so we’re back to full employment.
Why the difference this time? Primarily because federal regulatory policies following the recession kept a brake on growth. President Obama preferred full employment, but he wanted his regulatory agenda more. President Trump released the Obama brake and the economy quickly sped up, averaging almost 3% GDP growth over the last nine months of 2017.
Numerous figures are cited to suggest full employment remains months, if not years away, but these figures often lack context. For example, according to the latest data about 6.7 million workers don’t have a job, suggesting we’ve a long way to go to reach full employment.
Even at full employment, some Americans will be out of work, usually temporarily, but how many?
On the other hand, what should the number be? Some people lack the skills needed for today’s workforce, or just can’t find the job they want at the wage they expect. Others are between jobs, part of what is called “frictional unemployment.” Even at full employment, some Americans will be out of work, usually temporarily, but how many?
One answer comes from looking at the ratio of the unemployed to the total working age population, which includes those between 18 and 65 years of age who may be in the workforce, or may not be and are not looking for work. The overall working age population is steadily rising, so such a ratio allows useful comparisons over time.
The ratio of non-workers to the total potential workforce is 3.7% today. In the most recent comparable period of 2004-2007, following the Clinton recession of 2000-2001 and prior to the Great Recession, this ratio stood at 3.9%. Thus, this measure suggests we’re about at full employment already.
Those marginally attached to the workforce provide another commonly cited figure suggesting full employment remains in the far future. In January about five million workers identified as working part-time when they wanted to work full-time. Again, this sounds like a lot of excess labor capacity, but what should the number be? For context, it hit a post millennium low of four million in 2006 and topped out at 8.7 million following the recession.
This data suggests as many as one million people working part-time would prefer to work full-time. If those part-time workers are currently working half as many hours as they would want, this suggests the equivalent of about a half million in total gains to full-time full employment may be possible.
Data suggests as many as one million people working part-time would prefer to work full-time.
Yet a third piece of data suggesting full employment lies in the future is the labor force participation rate (LFPR), which stands today at 62.1 %. This rate is about 4.5 percentage points below where it stood just prior to the Great Recession, suggesting again we’ve some catching up to do. But, maybe not.
The LFPR has changed dramatically in the post WWII period. In the two decades through 1965 the LFPR bounced around 60%. It than began a remarkable climb toward 67%, after which it began a steady decline toward 62.7% today. The previous rise to 67% was largely driven by increases in the percentage of women in the workforce; the more recent decline largely results from the creeping retirement of the baby boomers. Considering the senior boom’s ongoing effects, the LFPR today appears to be right about where the known demographics predict, suggesting we’re at least very close to full employment.
Being at least close to full employment, is there any reason to believe we are not already at full employment? Yes, with a caveat. In short, the monthly job gains are too high for us to be at full employment.
When the economy is at full employment, job gains over time should roughly match the rate of growth of the labor force. This is where the caveat comes in, as various factors could influence the growth in the “labor force.” Immigration is an obvious example, but there are many others, such as changes in the size of the military. Another example involves changes in the average number of hours worked. As wages rise, some individuals choose to work additional hours, or take on second jobs. If a worker putting in 40 hours a week is deemed fully employed, what do we call a worker putting in 50 hours a week, other than exhausted?
Constraining the issue to the current population and assuming no change in related institutional arrangements, monthly labor force growth is currently in the range of 75,000 and 100,000 persons. January job growth was 200,000. Over the past three months it averaged almost as much. Over the past year monthly job growth averaged 176,000. So job growth remains too high relative to the underlying labor force growth rate for the economy to be at full employment.
Of course, labor force growth can change for the reasons mentioned. And job growth can also slow because the economy has hit a speed bump of some sort, but assuming this is not the case then we will know we’ve finally hit full employment when monthly job growth is running at or about 100,000 jobs a month. We’re not there yet, but perhaps in 2018.