08/17/2016 Toby Dayton

Full Employment

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Since early in Q2, we have argued (see hereherehere and here) that the U.S. labor market is in a state of Full Employment, defined as that level of unemployment below which wage inflation begins to materialize. While the Fed has taken a ‘wait-and-see’ attitude towards Full Employment, economists elsewhere are finally starting to see what we’ve seen for months. As Paul Krugman recently wrote on his blog, albeit with somewhat less conviction than we maintain…

“More important, probably, is the fact that two of the major advanced economies — the US and, believe it or not, Japan — are arguably quite close to full employment. We don’t know how close, because we don’t know how much pent-up labor supply is still waiting on the sidelines. But you can no longer argue that supply limits are no longer relevant.”

In regard to both Full Employment and the challenges in accurately identifying slack in labor supply, We echoed similar sentiments in our August 5th post in advance of the July jobs report

Unfortunately, predictability around monthly net gains in non-farm payrolls (NFP) seems to be dealing with its own bout of chaos syndrome lately. I’d posit that the chaos around forecasting monthly jobs reports these days is caused, first and foremost, by the fact that the U.S. labor market is most definitely in a state of Full Employment, defined as that level of unemployment below which wage inflation is triggered. It is a fact that wage inflation has become quite evident across multiple segments of the labor market and there is mounting evidence that it is becoming increasingly pervasive throughout the entire economy in nearly every region of the country.

The challenge for economists, the Fed, and forecasters, however, is that there is tremendous uncertainty as to how much slack there is in the labor force, the rate at which the underemployed and ‘marginally attached’ will return to the workforce, the impact of rising wages on the gig economy, the structural impact of technological changes to the U.S. workforce, the rate of baby-boomer retirement, and the persistently low labor force participation rate. All of these factors are wreaking havoc in trying to assess what type of job gains we can expect each month given the continued strength of the job market.

It’s nice to see the growing consensus around the fact that the U.S. has, most assuredly, reached Full Employment.

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