What to Watch on Jobs Day: Multiple measures indicate the presence of labor market slack

I’ve written a lot about wages in recent months. In March, I detailed trends in wages through 2017 in a report, with specific emphasis on growing inequality both across the wage distribution and between black and white workers. My “What to Watch on Jobs Day” blog post last month, as well as my statement on jobs day, tried to put wage growth in perspective by comparing multiple measures of wage growth and showing how many of them fell short of levels that would be needed to confidently declare the economy at full employment. On Friday’s Jobs Day, I will look at wage growth once again, as well as other measures of labor market slack which indicate that the economy has yet to unambiguously reach full employment.

Wage growth is a really important measure of labor market strength, and while slow wage growth is not just an indication that the economy remains below full employment, by definition slow wage growth means there continues to be some slack in the labor market. Slow wage growth tells us that employers continue to hold the cards, and don’t have to offer higher wages to attract workers. In other words, workers have very little leverage to bid up their wages. Slow wage growth is evidence that employers and workers both know there are still workers waiting in the wings ready to take a job, even if they aren’t actively looking for one. But, you say, the unemployment rate is 4.1 percent. Where are these workers waiting in the wings? The focus of this blog post and what I’ll be looking at on Friday (along with wages) are the other measures that similarly indicate there remains a non-trivial amount of slack in the labor market. I’ll argue that we can actually see this “waiting in the wings” in the data in other measurable ways, aside from weak wage growth.

Last week, my colleague Josh Bivens highlighted one underappreciated measure of labor market flows:  the share of the newly employed that come from out of the labor force. One might be tempted to believe that the labor force represents a rather static and cleanly-defined group of people: those who have a job or those who don’t but want one and are actively looking for one. If that were the case, then the total labor force wouldn’t fluctuate so much and only the unemployment rate would move up and down at different points in the business cycle. But, the labor force itself ebbs and flows, even relative to the working-age population.

In February, the prime-age labor force participation rate hit a recovery high of 82.2 percent. I’m focusing here on the prime-age population, those 25-54 years old, to remove any structural changes in the labor force due to, for instance, retiring baby boomers. The labor force participation rate for prime-age workers bottomed out in the aftermath of the Great Recession at 80.6 percent, and remains significantly below its 2007 peak of 83.4 percent or its series high of 84.6 percent in 1999. The weak recovery and expansion from 2000-2007 found participation in the labor force lower when this business cycle ended than when it began, and the rate still has a ways to go to recover from the Great Recession, let alone get back to the level it reached in 1999. So, as the economy recovers, not only does the unemployment rate fall, but the participation rate increases.

One way to examine this (and here’s where Josh’s snapshot from last week comes in) is to examine labor market flows from one month to the next. Because the household survey tracks people for multiple months, we can know what workers this month were doing last month. If they weren’t working in the previous month, they are either looking for work (counted as the unemployed) or not (counted as out of the labor force). The figure below tells a pretty compelling story. A large and growing share of newly employed workers were out of the labor force in the previous month.

Figure A

Share of newly employed workers who said that they were not actively searching for work in the previous month

month Share of newly employed workers who said that they were not actively searching for work in the previous month
Apr-1990 0.619061
May-1990 0.625533
Jun-1990 0.619756
Jul-1990 0.620126
Aug-1990 0.615639
Sep-1990 0.623043
Oct-1990 0.610341
Nov-1990 0.612361
Dec-1990 0.603578
Jan-1991 0.598715
Feb-1991 0.589661
Mar-1991 0.585127
Apr-1991 0.576754
May-1991 0.575825
Jun-1991 0.572041
Jul-1991 0.580339
Aug-1991 0.577504
Sep-1991 0.577201
Oct-1991 0.572706
Nov-1991 0.569388
Dec-1991 0.570487
Jan-1992 0.568121
Feb-1992 0.570804
Mar-1992 0.571117
Apr-1992 0.571646
May-1992 0.57303
Jun-1992 0.5658
Jul-1992 0.564165
Aug-1992 0.561335
Sep-1992 0.559473
Oct-1992 0.5574
Nov-1992 0.558308
Dec-1992 0.56138
Jan-1993 0.5661
Feb-1993 0.577037
Mar-1993 0.582508
Apr-1993 0.584087
May-1993 0.582408
Jun-1993 0.58065
Jul-1993 0.575438
Aug-1993 0.575111
Sep-1993 0.580261
Oct-1993 0.589173
Nov-1993 0.584807
Dec-1993 0.583045
Jan-1994 0.587624
Feb-1994 0.592373
Mar-1994 0.590883
Apr-1994 0.586644
May-1994 0.583134
Jun-1994 0.584736
Jul-1994 0.585821
Aug-1994 0.590357
Sep-1994 0.591369
Oct-1994 0.597964
Nov-1994 0.600868
Dec-1994 0.603204
Jan-1995 0.603524
Feb-1995 0.595307
Mar-1995 0.596899
Apr-1995 0.597369
May-1995 0.592238
Jun-1995 0.595425
Jul-1995 0.594958
Aug-1995 0.599668
Sep-1995 0.60216
Oct-1995 0.598554
Nov-1995 0.606096
Dec-1995 0.598981
Jan-1996 0.597842
Feb-1996 0.602802
Mar-1996 0.606867
Apr-1996 0.609937
May-1996 0.607053
Jun-1996 0.608479
Jul-1996 0.614605
Aug-1996 0.607839
Sep-1996 0.6092
Oct-1996 0.602445
Nov-1996 0.605638
Dec-1996 0.596219
Jan-1997 0.590755
Feb-1997 0.589335
Mar-1997 0.602804
Apr-1997 0.613959
May-1997 0.617748
Jun-1997 0.611254
Jul-1997 0.603536
Aug-1997 0.612553
Sep-1997 0.618873
Oct-1997 0.624974
Nov-1997 0.626926
Dec-1997 0.628275
Jan-1998 0.633389
Feb-1998 0.626991
Mar-1998 0.628814
Apr-1998 0.623807
May-1998 0.634939
Jun-1998 0.632458
Jul-1998 0.641844
Aug-1998 0.639763
Sep-1998 0.652355
Oct-1998 0.651439
Nov-1998 0.650647
Dec-1998 0.649278
Jan-1999 0.655927
Feb-1999 0.655434
Mar-1999 0.642018
Apr-1999 0.652837
May-1999 0.66117
Jun-1999 0.674181
Jul-1999 0.663779
Aug-1999 0.656528
Sep-1999 0.653479
Oct-1999 0.655027
Nov-1999 0.652588
Dec-1999 0.651059
Jan-2000 0.643748
Feb-2000 0.654028
Mar-2000 0.656551
Apr-2000 0.65868
May-2000 0.655965
Jun-2000 0.659235
Jul-2000 0.653902
Aug-2000 0.654676
Sep-2000 0.655974
Oct-2000 0.665117
Nov-2000 0.673867
Dec-2000 0.680896
Jan-2001 0.690268
Feb-2001 0.68553
Mar-2001 0.679095
Apr-2001 0.66877
May-2001 0.657618
Jun-2001 0.653238
Jul-2001 0.657462
Aug-2001 0.661782
Sep-2001 0.665689
Oct-2001 0.654644
Nov-2001 0.643888
Dec-2001 0.629164
Jan-2002 0.625571
Feb-2002 0.623252
Mar-2002 0.616762
Apr-2002 0.619352
May-2002 0.628136
Jun-2002 0.644323
Jul-2002 0.645082
Aug-2002 0.640423
Sep-2002 0.63054
Oct-2002 0.630722
Nov-2002 0.637024
Dec-2002 0.640892
Jan-2003 0.642075
Feb-2003 0.641867
Mar-2003 0.644924
Apr-2003 0.642806
May-2003 0.636523
Jun-2003 0.635369
Jul-2003 0.630534
Aug-2003 0.632354
Sep-2003 0.634281
Oct-2003 0.643246
Nov-2003 0.647303
Dec-2003 0.636562
Jan-2004 0.636161
Feb-2004 0.634296
Mar-2004 0.648754
Apr-2004 0.643155
May-2004 0.642887
Jun-2004 0.637252
Jul-2004 0.642145
Aug-2004 0.645397
Sep-2004 0.640996
Oct-2004 0.642333
Nov-2004 0.639803
Dec-2004 0.644414
Jan-2005 0.646355
Feb-2005 0.647678
Mar-2005 0.648725
Apr-2005 0.651202
May-2005 0.657558
Jun-2005 0.660922
Jul-2005 0.665709
Aug-2005 0.658748
Sep-2005 0.665393
Oct-2005 0.661679
Nov-2005 0.659547
Dec-2005 0.659208
Jan-2006 0.657889
Feb-2006 0.672929
Mar-2006 0.672584
Apr-2006 0.676422
May-2006 0.673081
Jun-2006 0.671832
Jul-2006 0.667113
Aug-2006 0.664034
Sep-2006 0.658985
Oct-2006 0.669053
Nov-2006 0.676322
Dec-2006 0.683012
Jan-2007 0.68031
Feb-2007 0.670085
Mar-2007 0.664751
Apr-2007 0.658189
May-2007 0.661974
Jun-2007 0.67604
Jul-2007 0.67685
Aug-2007 0.6756
Sep-2007 0.668733
Oct-2007 0.669893
Nov-2007 0.674907
Dec-2007 0.665956
Jan-2008 0.663952
Feb-2008 0.654468
Mar-2008 0.656006
Apr-2008 0.647446
May-2008 0.651409
Jun-2008 0.649366
Jul-2008 0.652727
Aug-2008 0.642415
Sep-2008 0.629132
Oct-2008 0.621308
Nov-2008 0.619062
Dec-2008 0.623007
Jan-2009 0.622165
Feb-2009 0.616412
Mar-2009 0.60786
Apr-2009 0.598018
May-2009 0.596437
Jun-2009 0.582744
Jul-2009 0.574579
Aug-2009 0.569886
Sep-2009 0.567641
Oct-2009 0.576422
Nov-2009 0.567488
Dec-2009 0.576904
Jan-2010 0.578612
Feb-2010 0.587717
Mar-2010 0.586724
Apr-2010 0.573916
May-2010 0.564274
Jun-2010 0.565743
Jul-2010 0.572292
Aug-2010 0.584419
Sep-2010 0.58809
Oct-2010 0.588882
Nov-2010 0.589282
Dec-2010 0.584289
Jan-2011 0.591446
Feb-2011 0.594683
Mar-2011 0.601371
Apr-2011 0.603528
May-2011 0.602166
Jun-2011 0.596796
Jul-2011 0.597807
Aug-2011 0.595821
Sep-2011 0.606437
Oct-2011 0.597534
Nov-2011 0.598333
Dec-2011 0.590722
Jan-2012 0.591505
Feb-2012 0.59129
Mar-2012 0.594276
Apr-2012 0.602752
May-2012 0.609131
Jun-2012 0.615909
Jul-2012 0.617823
Aug-2012 0.623328
Sep-2012 0.622822
Oct-2012 0.619895
Nov-2012 0.618395
Dec-2012 0.625089
Jan-2013 0.622187
Feb-2013 0.615453
Mar-2013 0.616257
Apr-2013 0.630587
May-2013 0.634564
Jun-2013 0.631616
Jul-2013 0.622948
Aug-2013 0.629017
Sep-2013 0.63489
Oct-2013 0.642887
Nov-2013 0.641139
Dec-2013 0.635523
Jan-2014 0.639282
Feb-2014 0.634809
Mar-2014 0.638696
Apr-2014 0.626694
May-2014 0.640433
Jun-2014 0.643762
Jul-2014 0.660209
Aug-2014 0.656453
Sep-2014 0.653649
Oct-2014 0.649485
Nov-2014 0.654021
Dec-2014 0.658727
Jan-2015 0.673065
Feb-2015 0.677886
Mar-2015 0.683661
Apr-2015 0.67824
May-2015 0.682307
Jun-2015 0.680813
Jul-2015 0.690146
Aug-2015 0.687777
Sep-2015 0.688177
Oct-2015 0.686184
Nov-2015 0.687963
Dec-2015 0.691383
Jan-2016 0.688694
Feb-2016 0.697439
Mar-2016 0.703791
Apr-2016 0.704355
May-2016 0.693009
Jun-2016 0.690739
Jul-2016 0.690826
Aug-2016 0.696935
Sep-2016 0.691895
Oct-2016 0.681299
Nov-2016 0.678957
Dec-2016 0.689265
Jan-2017 0.696841
Feb-2017 0.690351
Mar-2017 0.68693
Apr-2017 0.690273
May-2017 0.697058
Jun-2017 0.70615
Jul-2017 0.704329
Aug-2017 0.709059
Sep-2017 0.703789
Oct-2017 0.705424
Nov-2017 0.710066
Dec-2017 0.70918
Jan-2018 0.715345
Feb-2018 0.710054
Mar-2018 0.705621

 

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Source: Bureau of Labor Statistics

Source: Bureau of Labor Statistics, Labor Force Flows: Unemployed to Employed (16 Years and Over) [LNS17400000], and Not in Labor Force to Employed (16 years and over) [LNS17200000], retrieved from FRED (Federal Reserve Bank of St. Louis), March 28, 2018

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In the two years when the unemployment rate averaged 4.1 percent (1999 and 2000), the flow rate from out of the labor force into employment was only 66 percent. That is, 66 of the newly employed came from out of the labor force. In February 2018, that same flow rate was much higher at 72 percent. This suggests that today’s unemployment rate may be understating overall labor market slack. On Friday, I will look at this measurement and other metrics of labor market strength to make a complete assessment of today’s economy. Each measure, including the unemployment rate, provide part of the picture, but only the whole story can be told using a variety of measures, including ones that look at other dimensions of the labor force, including differences for various demographic groups such as by race and education.

While I’m borrowing Josh’s great graphics, I also want to reprint this really useful display of multiple measures of macroeconomic performance from Josh’s report last week where he makes recommendations for creating jobs and economic security. The figure below shows just how far we are from really testing the extend of full employment in the economy today. Price inflation remains below target levels, wage growth remains weak, and the prime-age employment to population ratio still has far to run to return to levels seen in a stronger economy. These measures all tell the same story: the U.S. economy is still below full employment.

Figure B

Plenty of evidence indicates that we’re not at the limits of full employment: Inflation, wage growth, interest rates, and the share of adults between the ages of 25 and 54 with a job, 2000–2017

Date Price inflation Wage growth Interest rates Prime-age EPOP
2000-01-01 1.6691% 3.7594% 6.47% 81.8%
2000-04-01 1.6868% 3.7975% 6.18% 81.6%
2000-07-01 1.8021% 3.8348% 5.89% 81.2%
2000-10-01 1.8298% 4.0966% 5.57% 81.3%
2001-01-01 1.8446% 4.0580% 5.04% 81.3%
2001-04-01 1.9072% 4.0172% 5.28% 80.8%
2001-07-01 1.7337% 3.6222% 5.00% 80.3%
2001-10-01 1.7605% 3.3732% 4.76% 79.8%
2002-01-01 1.4767% 2.9944% 5.08% 79.7%
2002-04-01 1.6742% 2.6897% 5.11% 79.4%
2002-07-01 1.9091% 2.9472% 4.27% 79.3%
2002-10-01 1.7462% 3.0591% 4.00% 79.0%
2003-01-01 1.7033% 3.1778% 3.92% 78.9%
2003-04-01 1.4788% 2.8878% 3.62% 79.0%
2003-07-01 1.3655% 2.5965% 4.23% 78.7%
2003-10-01 1.3676% 1.9789% 4.29% 78.7%
2004-01-01 1.6692% 1.8349% 4.01% 78.8%
2004-04-01 1.9163% 2.0235% 4.60% 79.0%
2004-07-01 1.9725% 2.1415% 4.30% 79.1%
2004-10-01 2.0929% 2.4580% 4.18% 79.0%
2005-01-01 2.1905% 2.5097% 4.30% 79.2%
2005-04-01 2.1166% 2.6232% 4.16% 79.4%
2005-07-01 2.0706% 2.7319% 4.22% 79.5%
2005-10-01 2.2600% 3.0303% 4.49% 79.3%
2006-01-01 2.1294% 3.4526% 4.58% 79.7%
2006-04-01 2.2716% 3.9277% 5.07% 79.7%
2006-07-01 2.3957% 4.0198% 4.89% 79.8%
2006-10-01 2.1577% 4.1054% 4.63% 80.1%
2007-01-01 2.3628% 4.0655% 4.68% 80.2%
2007-04-01 2.0362% 4.0792% 4.85% 80.0%
2007-07-01 1.9895% 4.1023% 4.74% 79.8%
2007-10-01 2.2482% 3.7669% 4.27% 79.7%
2008-01-01 2.1117% 3.8484% 3.67% 79.9%
2008-04-01 2.2660% 3.6311% 3.88% 79.5%
2008-07-01 2.2260% 3.7122% 3.86% 78.9%
2008-10-01 1.6417% 3.9138% 3.23% 78.0%
2009-01-01 1.1791% 3.5935% 2.74% 76.6%
2009-04-01 1.1621% 3.1146% 3.32% 76.0%
2009-07-01 0.9904% 2.6982% 3.52% 75.5%
2009-10-01 1.4157% 2.6201% 3.46% 75.0%
2010-01-01 1.5539% 2.4932% 3.72% 75.1%
2010-04-01 1.3290% 2.4811% 3.49% 75.2%
2010-07-01 1.2923% 2.3593% 2.78% 75.1%
2010-10-01 0.9707% 2.1809% 2.88% 74.9%
2011-01-01 1.0544% 2.1682% 3.46% 75.2%
2011-04-01 1.3995% 2.1053% 3.20% 75.1%
2011-07-01 1.6613% 2.0430% 2.41% 75.0%
2011-10-01 1.8617% 1.8220% 2.05% 75.2%
2012-01-01 2.0858% 1.5010% 2.04% 75.6%
2012-04-01 1.9456% 1.5464% 1.83% 75.7%
2012-07-01 1.7477% 1.4374% 1.64% 75.8%
2012-10-01 1.7784% 1.4315% 1.71% 76.0%
2013-01-01 1.6282% 1.9378% 1.95% 75.7%
2013-04-01 1.4418% 1.8782% 1.99% 75.9%
2013-07-01 1.4803% 2.1255% 2.71% 76.0%
2013-10-01 1.4910% 2.3186% 2.74% 75.9%
2014-01-01 1.4641% 2.3512% 2.77% 76.5%
2014-04-01 1.6664% 2.3916% 2.62% 76.6%
2014-07-01 1.7104% 2.3786% 2.50% 76.8%
2014-10-01 1.5458% 2.1675% 2.28% 77.0%
2015-01-01 1.3741% 1.8573% 1.97% 77.2%
2015-04-01 1.3053% 2.0438% 2.16% 77.3%
2015-07-01 1.2956% 2.0329% 2.22% 77.2%
2015-10-01 1.3289% 2.3144% 2.19% 77.3%
2016-01-01 1.6486% 2.4472% 1.91% 77.8%
2016-04-01 1.7250% 2.4797% 1.75% 77.8%
2016-07-01 1.8425% 2.5142% 1.56% 77.9%
2016-10-01 1.8668% 2.4034% 2.14% 78.1%
2017-01-01 1.7864% 2.3419% 2.45% 78.4%
2017-04-01 1.5195% 2.2801% 2.26% 78.5%
2017-07-01 1.3535% 2.3600% 2.24% 78.6%
2017-10-01 1.4873% 2.3470% 2.37% 79.0%
ChartData Download data

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Notes: The prime-age EPOP (employment-to-population ratio) is the share of adults between the ages of 25 and 54 with a job. Interest rates are rates on 10-year constant maturity Treasury bonds. Wage growth is the four-quarter change in average hourly earnings of production and nonsupervisory workers from the Current Employment Statistics program of the Bureau of Labor Statistics (BLS). Inflation is the four-quarter change in the price index for core personal consumption expenditures from the Bureau of Economic Analysis.

Source: Author’s analysis of BLS Current Population Survey program data (for prime-age EPOP), U.S. Treasury data (for interest rates), BLS Current Employment Statistics data (for wage growth), and Bureau of Economic Analysis data (for price inflation)

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