[by JB and Ben Spielberg]
Earlier today, Jared wrote:
“Look at the employment ratio; look at Andy Levin’s all-in slack measure (I’ll post something on this later)—they’re still signaling a job market that is unquestionably improving but is still far from full employment.”
In this post, we briefly explain some of the evidence that there’s far more labor market slack than is apparent from the unemployment rate alone.
The unemployment rate doesn’t capture workers who, because of a difficult job market, have stopped looking for work. The labor force participation rate – the share of the population that is either working or actively looking for work – dropped off sharply during the recession, from about 66 percent to about 63 percent. While some of those folks left for retirement, others–maybe a third to a half by some measures–can be enticed back into a more welcoming job market.
A number of prime-age workers (those between age 25 and age 54), for example, have dropped out of the picture. The figure below shows the employment-to-population ratio for workers in this age group. Notice the five-percentage-point plunge it took during the recession; while it has nudged back up to just over 77 percent, it is still three percentage points beneath its pre-recession level.
The “total employment gap,” developed by economist Andy Levin, is another indicator of the amount of labor market slack. The total employment gap accounts for three populations of potential workers: the unemployed (who are actively looking for jobs), those who have left the labor force but could potentially come back into it, and the number of workers with a part-time job who would rather have a full-time position. Using high-end estimates of the “natural” number of workers in each category (see data note below), we estimate that the total employment gap is at least 2.4 percentage points.
It is therefore unsurprising that we’ve yet to see much in the way of wage growth–while the job market is steadily improving, we aren’t yet at full employment. It is essential that policymakers keep these broader measures of labor slack in mind.
Data Note: The Levin gap measure relies on estimates of the size of the “potential” labor force and the “natural rate” of unemployment from the Congressional Budget Office, as well as an estimate, based on the pre-recession trend, of the “natural” number of full-time-equivalent involuntary part-time workers.