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