American labor markets are finally turning the page on the GGR and the OTR – that would be the Great Global Recession and the Obama Tepid Recovery. By just about every measure, eight years after the recovery began the U.S. economy is at long last at or very near full employment.
It’s been so long, this return to full employment may come as something of a shock to policymakers and businesses alike.
One implication of this new happy reality will be the downshifting in job growth, which will almost surely be misinterpreted initially as a sign of trouble and cause for worry. It will be neither, but it will have very real consequences for economic growth going forward.
Job growth averaged 187,000 from June of 2016 to June of 2017. Over the previous 12-month period, job growth averaged 202,000 and 240,000 the previous twelve months. Over the same period the unemployment rate dropped from 5.4 percent to 4.9 percent to 4.4 percent. As labor markets moved toward full employment, the number of workers available for hire has fallen.
Roughly speaking, once the economy is truly at full employment then monthly job growth will likely average about 75,000. If we’re really at full employment today, why is the reported monthly job growth still much higher? because “full employment” isn’t a fixed point of reference.
Let me explain. Some Americans who want to work remain out of the workforce, but are steadily drawn in as the job market tightens. As they re-enter the workforce and find jobs, they bump up the growth rate of hirings and of the overall labor force. For example, in the Labor Department’s monthly household survey about 1.6 million individuals identify themselves as not in the workforce, but willing and available to work. This figure has dropped by about 200,000 over the last year. The comparable figure prior to the recession was about 1.5 million, suggesting this source of additional labor will be tapped out early in 2018.
Another group of Americans want to work full time but can only find part-time jobs, and their ranks are thinning, too. About 5.3 million Americans fit this category, a figure that has fallen by about 500,000 over the past year. Prior to the recession, the comparable figure was about 4.4 million.
Taken together, these figures suggest if job growth continues into the future at the same pace as the nearly 200,000 jobs gained on average over the past three months, then the last elements of real slack should have been wrung out of the labor markets by Spring of 2018. In fact, the process will likely take a bit longer as the job growth numbers slide steadily. But we should not be deceived into believing the declining job numbers are cause for concern unless they corroborate other clear signs of a slowing economy.
The decline in the rate of job growth will have two knock on effects worth noting. The first is that if productivity growth doesn’t compensate with a comparable uptick, then the slowdown in employment growth will drive a slowdown in the overall growth of the economy. This is where policies like comprehensive tax reform can make a huge difference.
A second knock-on effect from the decline in jobs growth will be an almost certain uptick in the growth rate of wages and salaries as employers are forced to bid up compensation rates to compete for workers. Substantial real wage gains have been a long time in coming, and their arrival will mark the last chapter in the long recovery from the Great Global Recession.