Policymakers shouldn’t assume slack is gone and should push for faster wage growth

The unemployment rate has fallen steadily over the last several years, and many have said that the current rate of 4.4 percent means we are back to (or have even dropped below) full employment—meaning that pushing unemployment any lower would cause inflation to accelerate above the Federal Reserve’s preferred 2 percent target. That is why many observers have applauded the Fed’s recent decisions to raise rates, even though the rate hikes occurred before most workers have seen the economic recovery translate into consistently strong nominal wage growth.

The fact is that the headline unemployment rate continues to understate slack in the labor market. Today’s 4.4 percent unemployment rate is associated with a much lower prime-age employment-to-population ratio (EPOP)—the share of the working age population who is actually working—than in the recent past. While there may be reasons other than labor market slack for today’s lagging labor force participation, by looking just at the prime-age EPOP, we can at least eliminate any distortions caused by the wave of retiring baby boomers. The graph below shows that the prime-age EPOP averaged 81.2 percent in the five months the unemployment rate hit 4.4 percent in 1998 and 1999 (including one month in 2001), and 80.5 percent in the four months unemployment hit 4.4 percent in 2006 and 2007. On average, those nine months saw a 2.1 percentage point higher prime-age EPOP (80.7 percent) than the 78.6 percent we see today.

Figure A

When unemployment is 4.4 percent, the prime-age employment-to-population ratio is historically much higher: Average prime-age employment-to-population ratio when the unemployment rate was 4.4 percent in last two business cycles

Year Average prime-age EPOP during months that unemployment rate was 4.4
1998/1999 81.2
2006/2007 80.1
2017 78.6
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Note: The unemployment rate hit 4.4% in "1998/1999" (May 1998, November 1998, December 1998, February of 1999, and April 2001), "2006/2007" (October 2006, December 2006, March 2007, and May 2007), and "2017" (April 2017). The vertical axis is scaled to the minimum and maximum values (74.8 and 81.9) of the prime-age (25-54) employment-to-population ratio over the last two decades.

Source: EPI analysis of BLS Current Population Survey public data series.

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An unemployment rate of 4.4 percent no longer conveys the same information about the tightness of the labor market as it did in the previous business cycles. The last business cycle, like the current one, never saw demand growth strong enough to get us to genuine full employment, but the extent of that weakness was mostly hidden if you just looked at headline unemployment.

At 78.6 percent, the current prime-age EPOP is only where it was at the bottom of the last full business cycle. Yes, we’ve seen great improvements since the depths of the Great Recession and immediate aftermath, but we are not nearing the end of economic improvements possible. We still have a chance of reaching genuine full employment in the current recovery, as long as the Fed keeps its foot off the brakes.

Jobs Day

Employment-to-population ratio of workers ages 25-54, 1989–2017

Employment-to-population ratio
Jan-1989 80.0
Feb-1989 79.9
Mar-1989 79.9
Apr-1989 79.8
May-1989 79.8
Jun-1989 79.8
Jul-1989 79.8
Aug-1989 79.9
Sep-1989 80.0
Oct-1989 79.9
Nov-1989 80.2
Dec-1989 80.1
Jan-1990 80.2
Feb-1990 80.2
Mar-1990 80.1
Apr-1990 79.9
May-1990 79.9
Jun-1990 79.8
Jul-1990 79.6
Aug-1990 79.5
Sep-1990 79.4
Oct-1990 79.4
Nov-1990 79.2
Dec-1990 79.0
Jan-1991 78.9
Feb-1991 78.9
Mar-1991 78.7
Apr-1991 79.0
May-1991 78.6
Jun-1991 78.7
Jul-1991 78.6
Aug-1991 78.5
Sep-1991 78.6
Oct-1991 78.5
Nov-1991 78.4
Dec-1991 78.3
Jan-1992 78.4
Feb-1992 78.2
Mar-1992 78.2
Apr-1992 78.4
May-1992 78.4
Jun-1992 78.5
Jul-1992 78.4
Aug-1992 78.4
Sep-1992 78.3
Oct-1992 78.2
Nov-1992 78.2
Dec-1992 78.2
Jan-1993 78.2
Feb-1993 78.1%  
Mar-1993 78.2
Apr-1993 78.2
May-1993 78.5
Jun-1993 78.6
Jul-1993 78.6
Aug-1993 78.8
Sep-1993 78.6
Oct-1993 78.7
Nov-1993 79.0
Dec-1993 79.0
Jan-1994 78.9
Feb-1994 78.9
Mar-1994 78.9
Apr-1994 79.0
May-1994 79.2
Jun-1994 78.8
Jul-1994 79.1
Aug-1994 79.2
Sep-1994 79.6
Oct-1994 79.6
Nov-1994 79.8
Dec-1994 79.8
Jan-1995 79.7
Feb-1995 80.0
Mar-1995 79.9
Apr-1995 79.8
May-1995 79.7
Jun-1995 79.5
Jul-1995 79.7
Aug-1995 79.6
Sep-1995 79.8
Oct-1995 79.8
Nov-1995 79.7
Dec-1995 79.7
Jan-1996 79.8
Feb-1996 79.9
Mar-1996 79.9
Apr-1996 79.9
May-1996 80.0
Jun-1996 80.1
Jul-1996 80.4
Aug-1996 80.5
Sep-1996 80.4
Oct-1996 80.6
Nov-1996 80.5
Dec-1996 80.5
Jan-1997 80.5
Feb-1997 80.4
Mar-1997 80.6
Apr-1997 80.7
May-1997 80.6
Jun-1997 80.9
Jul-1997 81.1
Aug-1997 81.3
Sep-1997 81.1
Oct-1997 81.1
Nov-1997 81.0
Dec-1997 81.0
Jan-1998 81.0
Feb-1998 81.0
Mar-1998 81.0
Apr-1998 81.1
May-1998 81.0
Jun-1998 81.0
Jul-1998 81.1
Aug-1998 81.2
Sep-1998 81.3
Oct-1998 81.1
Nov-1998 81.2
Dec-1998 81.3
Jan-1999 81.8
Feb-1999 81.5
Mar-1999 81.3
Apr-1999 81.3
May-1999 81.4
Jun-1999 81.4
Jul-1999 81.2
Aug-1999 81.3
Sep-1999 81.3
Oct-1999 81.5
Nov-1999 81.6
Dec-1999 81.5
Jan-2000 81.8
Feb-2000 81.8
Mar-2000 81.7
Apr-2000 81.9%  
May-2000 81.5
Jun-2000 81.5
Jul-2000 81.3
Aug-2000 81.1
Sep-2000 81.1
Oct-2000 81.1
Nov-2000 81.3
Dec-2000 81.4
Jan-2001 81.4
Feb-2001 81.3
Mar-2001 81.3
Apr-2001 80.9
May-2001 80.8
Jun-2001 80.6
Jul-2001 80.5
Aug-2001 80.2
Sep-2001 80.2
Oct-2001 79.9
Nov-2001 79.7
Dec-2001 79.8
Jan-2002 79.6
Feb-2002 79.8
Mar-2002 79.6
Apr-2002 79.5
May-2002 79.4
Jun-2002 79.2
Jul-2002 79.1
Aug-2002 79.3
Sep-2002 79.4
Oct-2002 79.2
Nov-2002 78.8
Dec-2002 79.0
Jan-2003 78.9
Feb-2003 78.9
Mar-2003 79.0
Apr-2003 79.1
May-2003 78.9
Jun-2003 78.9
Jul-2003 78.8
Aug-2003 78.7
Sep-2003 78.6%
Oct-2003 78.6
Nov-2003 78.7
Dec-2003 78.8
Jan-2004 78.9
Feb-2004 78.8
Mar-2004 78.7
Apr-2004 78.9
May-2004 79.0
Jun-2004 79.1
Jul-2004 79.2
Aug-2004 79.0
Sep-2004 79.0
Oct-2004 79.0
Nov-2004 79.1
Dec-2004 78.9
Jan-2005 79.2
Feb-2005 79.2
Mar-2005 79.2
Apr-2005 79.4
May-2005 79.5
Jun-2005 79.2
Jul-2005 79.4
Aug-2005 79.6
Sep-2005 79.4
Oct-2005 79.3
Nov-2005 79.2
Dec-2005 79.3
Jan-2006 79.6
Feb-2006 79.7
Mar-2006 79.8
Apr-2006 79.6
May-2006 79.7
Jun-2006 79.8
Jul-2006 79.8
Aug-2006 79.8
Sep-2006 79.9
Oct-2006 80.1
Nov-2006 80.0
Dec-2006 80.1
Jan-2007 80.3%  
Feb-2007 80.1
Mar-2007 80.2
Apr-2007 80.0
May-2007 80.0
Jun-2007 79.9
Jul-2007 79.8
Aug-2007 79.8
Sep-2007 79.7
Oct-2007 79.6
Nov-2007 79.7
Dec-2007 79.7
Jan-2008 80.0
Feb-2008 79.9
Mar-2008 79.8
Apr-2008 79.6
May-2008 79.5
Jun-2008 79.4
Jul-2008 79.2
Aug-2008 78.8
Sep-2008 78.8
Oct-2008 78.4
Nov-2008 78.1
Dec-2008 77.6
Jan-2009 77.0
Feb-2009 76.7
Mar-2009 76.2
Apr-2009 76.2
May-2009 75.9
Jun-2009 75.9
Jul-2009 75.8
Aug-2009 75.6
Sep-2009 75.1
Oct-2009 75.0
Nov-2009 75.2
Dec-2009 74.8
Jan-2010 75.1
Feb-2010 75.1
Mar-2010 75.1
Apr-2010 75.4
May-2010 75.1
Jun-2010 75.2
Jul-2010 75.1
Aug-2010 75.0
Sep-2010 75.1
Oct-2010 75.0
Nov-2010 74.8%
Dec-2010 75.0
Jan-2011 75.2
Feb-2011 75.1
Mar-2011 75.3
Apr-2011 75.1
May-2011 75.2
Jun-2011 75.0
Jul-2011 75.0
Aug-2011 75.1
Sep-2011 74.9
Oct-2011 74.9
Nov-2011 75.3
Dec-2011 75.4
Jan-2012 75.5
Feb-2012 75.5
Mar-2012 75.7
Apr-2012 75.7
May-2012 75.7
Jun-2012 75.6
Jul-2012 75.6
Aug-2012 75.7
Sep-2012 76.0
Oct-2012 76.1
Nov-2012 75.8
Dec-2012 76.0
Jan-2013 75.6
Feb-2013 75.8
Mar-2013 75.8
Apr-2013 75.9
May-2013 76.0
Jun-2013 75.9
Jul-2013 76.0
Aug-2013 75.9
Sep-2013 76.0
Oct-2013 75.6
Nov-2013 76.1
Dec-2013 76.2
Jan-2014 76.4
Feb-2014 76.4
Mar-2014 76.6
Apr-2014 76.5
May-2014 76.4
Jun-2014 76.8
Jul-2014 76.7
Aug-2014 76.8
Sep-2014 76.8
Oct-2014 77.0
Nov-2014 77.0
Dec-2014 77.1
Jan-2015 77.1
Feb-2015 77.2
Mar-2015 77.2
Apr-2015 77.2
May-2015 77.2
Jun-2015 77.2
Jul-2015 77.1
Aug-2015 77.2
Sep-2015 77.3
Oct-2015 77.3
Nov-2015 77.5
Dec-2015 77.5
Jan-2016 77.7
Feb-2016 77.8
Mar-2016 78.0
Apr-2016 77.7
May-2016 77.8
Jun-2016 77.8
Jul-2016 78.0
Aug-2016 77.8
Sep-2016 78.0
Oct-2016 78.2
Nov-2016 78.2
Dec-2016 78.2
Jan-2017 78.2
Feb-2017 78.3%
Mar-2017 78.5%
Apr-2017 78.6% 
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Source: EPI analysis of Bureau of Labor Statistics' Current Population Survey public data

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Once the labor market tightens sufficiently, we should see that translate into consistently stronger nominal wage growth. At 2.5 percent over the year, wage growth remains below levels consistent with the Fed’s 2 percent inflation target and long term trend productivity growth. And, for the roughly bottom 80 percent of workers represented by the production/nonsupervisory wage series, in light blue, they may be seeing a bit of deceleration in recent months.

Nominal Wage Tracker

Nominal wage growth has been far below target in the recovery: Year-over-year change in private-sector nominal average hourly earnings, 2007–2017

All nonfarm employees Production/nonsupervisory workers
Mar-2007 3.59% 4.11%
Apr-2007 3.27% 3.85%
May-2007 3.73% 4.14%
Jun-2007 3.81% 4.13%
Jul-2007 3.45% 4.05%
Aug-2007 3.49% 4.04%
Sep-2007 3.28% 4.15%
Oct-2007 3.28% 3.78%
Nov-2007 3.27% 3.89%
Dec-2007 3.16% 3.81%
Jan-2008 3.11% 3.86%
Feb-2008 3.09% 3.73%
Mar-2008 3.08% 3.77%
Apr-2008 2.88% 3.70%
May-2008 3.02% 3.69%
Jun-2008 2.67% 3.62%
Jul-2008 3.00% 3.72%
Aug-2008 3.33% 3.83%
Sep-2008 3.23% 3.64%
Oct-2008 3.32% 3.92%
Nov-2008 3.64% 3.85%
Dec-2008 3.58% 3.84%
Jan-2009 3.58% 3.72%
Feb-2009 3.24% 3.65%
Mar-2009 3.13% 3.53%
Apr-2009 3.22% 3.29%
May-2009 2.84% 3.06%
Jun-2009 2.78% 2.94%
Jul-2009 2.59% 2.71%
Aug-2009 2.39% 2.64%
Sep-2009 2.34% 2.75%
Oct-2009 2.34% 2.63%
Nov-2009 2.05% 2.67%
Dec-2009 1.82% 2.50%
Jan-2010 1.95% 2.61%
Feb-2010 2.00% 2.49%
Mar-2010 1.77% 2.27%
Apr-2010 1.81% 2.43%
May-2010 1.94% 2.59%
Jun-2010 1.71% 2.53%
Jul-2010 1.85% 2.47%
Aug-2010 1.75% 2.41%
Sep-2010 1.84% 2.30%
Oct-2010 1.88% 2.51%
Nov-2010 1.65% 2.23%
Dec-2010 1.74% 2.07%
Jan-2011 1.92% 2.17%
Feb-2011 1.87% 2.12%
Mar-2011 1.87% 2.06%
Apr-2011 1.91% 2.11%
May-2011 2.00% 2.16%
Jun-2011 2.13% 2.00%
Jul-2011 2.26% 2.31%
Aug-2011 1.90% 1.99%
Sep-2011 1.94% 1.93%
Oct-2011 2.11% 1.77%
Nov-2011 2.02% 1.77%
Dec-2011 1.98% 1.77%
Jan-2012 1.75% 1.40%
Feb-2012 1.88% 1.45%
Mar-2012 2.10% 1.76%
Apr-2012 2.01% 1.76%
May-2012 1.83% 1.39%
Jun-2012 1.95% 1.54%
Jul-2012 1.77% 1.33%
Aug-2012 1.82% 1.33%
Sep-2012 1.99% 1.44%
Oct-2012 1.51% 1.28%
Nov-2012 1.90% 1.43%
Dec-2012 2.20% 1.74%
Jan-2013 2.15% 1.89%
Feb-2013 2.10% 2.04%
Mar-2013 1.93% 1.88%
Apr-2013 2.01% 1.73%
May-2013 2.01% 1.88%
Jun-2013 2.13% 2.03%
Jul-2013 1.91% 1.92%
Aug-2013 2.26% 2.18%
Sep-2013 2.04% 2.17%
Oct-2013 2.25% 2.27%
Nov-2013 2.24% 2.32%
Dec-2013 1.90% 2.16%
Jan-2014 1.94% 2.31%
Feb-2014 2.14% 2.45%
Mar-2014 2.18% 2.40%
Apr-2014 1.97% 2.40%
May-2014 2.13% 2.44%
Jun-2014 2.04% 2.34%
Jul-2014 2.09% 2.43%
Aug-2014 2.21% 2.48%
Sep-2014 2.04% 2.27%
Oct-2014 2.03% 2.27%
Nov-2014 2.11% 2.26%
Dec-2014 1.82% 1.87%
Jan-2015 2.23% 2.01%
Feb-2015 2.06% 1.71%
Mar-2015 2.18% 1.90%
Apr-2015 2.34% 2.00%
May-2015 2.34% 2.14%
Jun-2015 2.04% 1.99%
Jul-2015 2.29% 2.04%
Aug-2015 2.32% 2.08%
Sep-2015 2.40% 2.13%
Oct-2015 2.52% 2.36%
Nov-2015 2.39% 2.21%
Dec-2015 2.60% 2.61%
Jan-2016 2.46% 2.45%
Feb-2016 2.34% 2.40%
Mar-2016 2.37% 2.44%
Apr-2016 2.53% 2.53%
May-2016 2.48% 2.33%
Jun-2016 2.64% 2.52%
Jul-2016 2.72% 2.57%
Aug-2016 2.47% 2.42%
Sep-2016 2.67% 2.65%
Oct-2016 2.74% 2.40%
Nov-2016 2.53% 2.40%
Dec-2016 2.85% 2.54%
Jan-2017 2.56% 2.39%
Feb-2017 2.84% 2.48%
Mar-2017 2.59% 2.34%
Apr-2017 2.55% 2.33%
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*Nominal wage growth consistent with the Federal Reserve Board's 2 percent inflation target, 1.5 percent productivity growth, and a stable labor share of income.

Source: EPI analysis of Bureau of Labor Statistics Current Employment Statistics public data series

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The slack is there in depressed labor force participation and below target wage growth. You just have to look in the right places to find it. This makes the risks to policymakers of aggressively pursuing tighter labor markets smaller than the risks of prematurely slowing the recovery. If they instead are too quick on the trigger and slow the economy down prematurely, the benefits of full employment will simply not reach all corners of the labor market, including those young high school and college grads who will be dipping their toes in the labor market in the months to come.