Dreaming of Full Employment

April 1st, 2013 at 11:02 pm

Some people like to dream about Christmas when it’s August; I like to think about full employment when we’re stuck in the slog we’re in.

As I’ve mentioned, some colleagues and I are updating some earlier work of the benefits of full employment and I just wanted to post this little figure to remind us all what’s sacrificed when we live with this much labor market slack for this long.

It takes a few steps to make this chart so pay attention (clearly, making this chart look good was not one of the steps).

1)    Take log changes of real median family income, 1948-2011;

2)    Using CBO’s series on the unemployment rate associated with full employment (their NAIRU), subtract this value from the actual unemployment rate.

Thus, in 1969, for example, the actual unemployment rate was 3.5%, while CBO’s estimate of the full employment rate that year was 5.8% (and yes, we could have fun arguments about whether that’s correct, but not now).  So what’s called “FULLN” in the graph is 3.5%-5.8%, or -2.3.  That year, btw, real median income grew by 4.5% (imagine that…).  In other words, anytime fulln is below zero, the job market is tight and visa versa.

We’d expect a negative correlation—negative fulln associated with positive income growth—and that’s what we get.  In fact, the coefficient on fulln is about 0.9%, meaning that for every percentage point that unemployment is below full employment, median family income grows almost a percent in real terms.

Now, you see the four dots at the far right end of the graph, near the regression line, corresponding to high unemployment and large real income losses?  Those dots are for 2009-2011 and 1982, another crap year for jobs and incomes.  In fact, that dot right on the line…that’s from the most recent year of income data: 2011.  So we’re statistically lined up just where we should be.

Economically, or as regards living standards of middle-income families…not so much.

full1

Source: Census, CBO, BLS, my calculations.  See text.

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3 comments in reply to "Dreaming of Full Employment"

  1. Kevin Rica says:

    Back in 1969, the local unemployment rate in Rochester NY was 1.5%. (But that was before photography went digital and wiped out Kodak.

    But Jared, don’t try to persuade us. Try to persuade Chuck Schumer. He believes that there is a shortage of labor! — Especially of High School dropouts! Not enough people available to work for low wages!

    So if he is right: We have a labor shortage: More jobs than people.

    If you are right: We have unemployment: More people than jobs.

    You can’t both be right. That would violate the mathematical principle of transitivity.

    As the commercial says: “Talk to Chuck!”


  2. Tom in MN says:

    You’ve (previously) convinced me that full employment is a key goal, but I’m wondering how the Fed’s 2% inflation target fits this. As you’ve discussed before you can pick either an inflation or an unemployment target but then you have to take what the other ends up at. So currently with large unemployment we seen to have almost 2% inflation as the background level with no wage growth. To get some wage growth it seems to me we need about 4% inflation (2% background plus 2% of wage growth — the value in your plot at FULLN=0). The Fed has talked about tightening when inflation gets to 2.5% and this seems to too soon especially when you should expect overshoot in most systems you try to control.

    How about a look at the inflation rate vs your FULLN in a corresponding plot? The location of the trend line at zero FullN would seem to be the inflation target to use.


  3. R. Nemo says:

    Politics used to be about facts and reason. Sadly, it is now about nonsense. Glad I am an artist now and not involved in the absurdity of contemporary politics. I bet the CBO is 99 percent bullshit at this point.

    It really is a tragedy that we have come to a point of phony sophistry and eloquent mendacity.

    I guess we voted for it? Or did the colonizing corporations buy it? I think I know the answer to that!


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