HOT TOPIC: Full Employment: Are We There Yet?
In the fall of 2015, as the unemployment rate neared 5%, economists began to ask whether the U.S. economy was approaching “full employment,” a possibility that was hard to imagine when unemployment peaked at 10% in October 2009.1 In January and February 2016, the rate dropped to 4.9%, crossing a symbolic threshold and reaching the long-run goal that had been set by the Federal Reserve.2–3
More recently, in March 2016, the Fed dropped the long-run goal a notch to 4.8%, signalling continued optimism for employment even as it lowered expectations for overall economic growth in 2016.4
Here’s a closer look at the current jobs picture and the meaning of full employment in the post-recession economy.
Balancing Workers and Jobs
Full employment refers to an economic state in which the number of job openings roughly equals the number of job seekers. Theoretically, everyone who wants a job can find one. However, full employment doesn’t mean that everyone can find a good job, a job that fits his or her skills, or a job in a preferred location.
There is no magic number for full employment. A 0% unemployment rate is impossible, because there is always churn as people change jobs and move from place to place. The current 4.9% headline unemployment rate — based on people who have looked for jobs in the previous four weeks — is within the 4.6% to 5.0% range that some economists point to as signalling a healthy job market.5 And it is near the 4.7% rate set in November 2007, the month before the start of the Great Recession.6 But this only tells part of the story.
A more inclusive measure, the “underemployment rate,” also tracks people who are employed part-time but want full-time jobs, as well as discouraged workers who want jobs but have stopped looking. The underemployment rate stood at 9.7% in February 2016, well below the peak of 17.1% during the recession but still higher than the 8.4% figure before the recession.7
All of these percentages are based on Americans aged 16 and older, including many young people with low-level skills and experience. In February, the unemployment rate for adults aged 25 and older was just 4.1%; it was only 2.5% for those with a bachelor’s degree or higher.8
Unemployment also varies widely by location. Every state saw decreasing unemployment in 2014 (for the first time in 30 years), and 47 states improved in 2015. Yet 36 states still had not fully recovered to pre-recession levels. Some areas could struggle for many years.9
Watching Wage Growth
Wages were near stagnant during the early stages of the recovery because there was too much “slack” in the workforce — too many would-be employees for available jobs. This has started to change.
Median weekly earnings grew by 3.3% in 2015.10 Job openings are near an all-time high, suggesting that there may not be enough qualified applicants willing to work at current wages.11 Companies might have to increase compensation and/or hire workers away from their current employers, creating competition that could lead to higher wages.
Although many new jobs are in the low-paying service industry, there are higher-paying jobs waiting for those with a college degree or specialized skills. An August 2015 study found that low-wage and high-paying jobs had recovered all recession losses, but middle-wage jobs still lagged their pre-recession level.12 It may take time for middle-wage jobs to fully recover, but even if they do, it seems clear that education and training will be keys to success in the post-recession job market.
Shrinking Labor Force
While the unemployment rate has returned to pre-recession levels, the “labor force participation rate” — the percentage of working-age Americans who are employed or looking for a job — has not recovered.
The labor force participation rate peaked at 67.3% in the spring of 2000 and still stood at 66.0% when the recession began. It has fallen steadily since then, reaching a low of 62.4% in September 2015 before bouncing back slightly to 62.9% in February 2016. These recent levels have not been seen since the 1970s, when there were fewer women in the workforce.13
The recession accelerated the decline, but the shift is inevitable as the population ages. Though baby boomers are working longer than previous generations, the number of retirees is growing in relation to the number of workers. At the same time, younger people are spending more time in school and entering the workforce at a later age. Considering these demographic trends, full employment may never be quite as full as it was before the recession.14
Technology helps increase worker productivity, but it remains to be seen how the economy will function over the long term with a lower employment-to-population ratio.
It may take an extended period of strong employment to push wages higher and restore the confidence of American consumers. For now, the employment picture is mostly positive, and that bodes well for the broader economy.