The Bureau of Labor Statistics’ April jobs report showed that for just about a year straight, unemployment has remained under 5 percent. That’s laudable, considering the fact that unemployment surpassed 10 percent during the height of the recession. Now, some are saying the streak of low unemployment means that the country has reached a big post-recession goal: full employment, which many economists loosely define as the point where everyone who wants a job has one. This is, essentially, how economists ask whether this is as good as it gets for labor markets. But is America really there yet?
The answer to that question shapes the decision-making of the Federal Reserve Board of Governors, the body actually tasked with pursuing full employment and tweaking monetary policy to encourage it. The Fed hasn’t yet declared that the country is at full employment, but even if it doesn’t make a call soon, a choice to raise interest rates again—the main way the Fed exerts its influence—could indicate that it thinks that the economy has gained significant strength and is leaning toward full employment.
There’s no way to know the precise moment when the economic data aligns to indicate that labor-market growth has hit its sweet spot. In theory, that would occur when unemployment is as low as it could possibly go, and the labor market is employing everyone who wants to work, but the supply-and-demand dynamics have not yet shifted in a way that causes wages and prices to rise. Inevitably, declarations of full employment will come either before or after that optimal spot. And there are economic consequences to calling it too early or too late.
Some, including Douglas Holtz-Eakin, the president of the American Action Forum, argue that the economy has already reached this point. But he admits that the definition of full employment is pretty squishy. “There’s a conceptual place where you expect unemployment to go back to, a rate at which you’re not pressuring upward on prices,” he says. “That’s the key.” What Holtz-Eakins means by that is that America’s unemployment rate is never going to be zero, but after a recession, economists usually look for unemployment to get back to a more “normal” rate. There’s a sweet spot where the demand for workers and supply of available workers meet, but once that sweet spot is passed, demand for workers starts outpacing the supply of them, meaning that employers have to start increasing wages in order to compete. Once that process starts happening, economists say that the system has passed the point of balance.
That squishiness in how people define full employment is part of the reason that economists haven’t come to a consensus on whether or not the country has reached that state. Michael Strain, the director of economic-policy studies at the American Enterprise Institute, a conservative think-tank, says that if the definition of full employment is the broad, generic one frequently used to quickly explain the concept—that is, that everyone who wants a job has one—then he agrees with Holtz-Eakin. But there’s room for nuance in the discussion, he says, and that nuance would lead him to a different conclusion. “If full employment is that condition plus the condition that those wage increases are so strong that they translate into overall price increases”—as in, the costs of goods and services must also start to rise to keep up with rising labor costs—“then no, I don’t think we’re there,” Strain told me.
That caveat helps illustrate the trickiness of judging whether or not the labor market has reached its full potential. Economists generally agree that, by historical standards, today’s unemployment statistics look good. Holtz-Eakin believes that full employment has been reached in part because of the U-6, a measurement of unemployment that takes into account discouraged workers—a group made famous for its growing population during the last recession and recovery. These are people who don’t have jobs but have stopped looking for them because they believe their efforts are futile. The number of workers who this applies to has been diminishing, both because workers who were only loosely attached to work have become more substantially tethered, and because fewer Americans who work part-time are reporting that they’re doing so because they simply can’t find full-time work. Between the declining unemployment rate and there being fewer workers stuck in the forgotten parts of the labor market, Holtz-Eakin says that’s enough to suggest that full-employment terms have been met.
But many Americans are still saying that they feel concerned about their economic standing. So how can America at once be at, or near, full employment while so many Americans say that they feel like they’re struggling? Holtz-Eakin says that whether people can work and whether people are happy are two different questions. “People are fully employed and fully unhappy because wage growth is too slow. That’s a fact.”
Some economists maintain that weak wage growth, along with other indicators that point to the labor market being less than perfectly healthy, is precisely a reason for saying full employment hasn’t been reached. “The rest of the data you’d expect to tell you you’re at full employment isn’t really saying that yet,” says Michael Madowitz, an economist at the left-leaning Center for American Progress. “It means we can keep growing, but only if we don’t do anything to slow the economy down.”
Josh Bivens, the director of research at the left-leaning Economic Policy Institute, says that the number of prime-age Americans who are actually working remains low, even by historical standards. And the wage and productivity growth that’s happened hasn’t been significant enough or speedy enough. For those reasons, Biven says the economy isn’t at full employment. But he says that he gets why people think it might be time to call it: The labor market has tightened up and now some economists are starting to fear that continuing expansionary policies—essentially, keeping interest rates artificially low—in hopes of drumming up jobs and growth could instead result in inflation. But Bivens would be inclined to wait to see if any evidence of that inflation shows in the data. And that hasn’t happened yet.
Some are eager to call full employment on the early side, because they fear that changing policies after the fact will produce too much inflation and price pressure. But Madowitz says that coming out of a recession when inflation was nonexistent means that, in the long run, a little too much inflation now wouldn’t be all that harmful. Calling full employment too early, some argue, could mean stunting growth in different ways, including hampering growth in wages and thus productivity—two areas that economists remain concerned about. “If we start tightening up too early and we never see sustained upward wage pressure, I think we could really lock in slow productivity growth,” Bivens said. “That would just be yet another bad scar of the Great Recession that we didn’t need to tolerate.”
Strain says that part of the argument for not declaring full employment is that even the indicators that have recovered substantially, such as the unemployment rate, could theoretically go lower. If true, that could help groups that historically high unemployment rates: blacks, Hispanics, and those without a college education. If it’s possible to get more of those workers into the labor market, that might be another argument for holding off on changing policy tactics.
Whether or not one believes that full employment has been reached, the fact remains that there are still some troubling weak spots in the labor market. And no one knows for sure whether measuring things like labor-force participation and productivity growth against historic economic norms is the right way to measure economic recovery in 2017. Holtz-Eakin thinks that expansionary policy isn’t the way to fix it. “I would declare a victory, normalize monetary policy, and then go look at the supply-side things that would raise productivity growth,” he said. Madowitz, though, says that might be precisely the wrong thing to do, as moves like aggressively raising interest rates or taxes in fear of adding to the deficit could mean cutting off growth that the economy needs.
Regardless of what side economists fall on at the moment, knowing when exactly the economy has reached its full employment potential will only be knowable in hindsight. But the policies put in place right now could ultimately set the labor market up for success or failure in the long term.