You Call This Full Employment?

March 8, 2015 1 Comment

Last Friday we received the much anticipated Employment Situation report, and barely anything unexpected happened (at least, if you’re me). The economy created 295,000 jobs last month, which was higher than the market forecast of 245,000 jobs. The unemployment rate also shank (for a bad reason) to 5.5% from 5.7%, which is the lowest level the unemployment rate has been since early 2008.

This range is considered normal by most Federal Reserve policy makers. It’s also, dare I say, close to full employment, or at least the 5.2% – 5.5% full range forecast instituted by the Federal Reserve.

If this is actually true, that means the economy is close to what is known as the Non-Accelerating Inflation Rate of Unemployment, also known as NAIRU. What does this mean? This means that the Federal Reserve could try to get the unemployment rate much lower than 5.5%, but to do this would increase inflation.

Yes, inflation is actually what the Fed wants, but this is the sort of inflation you get when you institute a minimum wage. Basic economic theory, under NAIRU, occurs a lower levels of unemployment when firms cannot find workers to fill vacant jobs without offering more pay. Workers become more competitive for higher wages, and everyone’s wages goes up. If everyone’s wages increase, firms need to raise prices, resulting in inflation (or cost-push inflation). 

Although the Fed’s mandate is to ensure maximum employment and stable prices (as long as stable means 2% or more), the Fed’s mandate must exceed beyond simply lowering the unemployment rate. But then again, who knows what goes on during the meetings at the Eccles building.

While achieving full employment (or not achieving it) sounds like a good idea, there is only one problem: we are no where near full employment.

There were 8.7 million people who were looking for work last month, another 6.5 million people who weren’t looking but claim that they want a job, and 6.6 people who could only find part-time work (part-time for economic reasons). That’s nearly 22 million people who are either out of work or don’t have the jobs they desire. There is really little evidence that the economy is heading towards full employment. Especially when you consider other participants who cannot utilize their full labor capacity. Without considering ways to include these individuals in the labor force, the headline unemployment rate (U-3 unemployment) could drop in the low 4s and the economy still wouldn’t achieve full employment.

You also need to consider the fact that wages aren’t exactly in the position to be taking off.

Average hourly earnings are still hovering around the 2% range annually. This is the same wage growth we’ve seen for the past 5 and a half years. When you consider nonsupervisory employees, wage growth is only up 1.6%. Considering this, there is no sign of the labor market being so constricted that employees bid up wages with their awesome negotiating skills.

The point of all this isn’t to show that the devil is in the details. There are plenty of financial bloggers who can do that. I’m not trying to point out if the economy is still sluggish (which it is). If anything, I’m laying out an inevitable scenario that will probably end up happening (thats if the Fed doesn’t raise interest rates first). Although the unemployment rate hasn’t mean’t much to anyone in a long time (not even the Fed) the unemployment rate can’t get much lower without people noticing that very little has actually changed with the economy. What happens then is anyone’s guess…

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