The Federal Reserve’s decision last week not to increase interest rates was preceded by a considerable amount of commentary that our economy, with a 5.1 percent overall unemployment rate, was close to “full employment.”
If an economy has reached “full employment” at a rate of about 5 percent unemployment, that’s the same as saying that what we have now is about as good as it will ever get. That suggests that unemployment rates among African Americans and Latinos are doomed to be up to twice that of white Americans, or that the 10 states plus the District of Columbia where unemployment rates exceeded 6 percent in August will never catch up unless it’s at another state or region’s expense.
But this is not as good as it can get, according to two policy analysts at the Atlanta Fed this week.
The paper by John Robertson and Ellyn Terry published this week suggests looking beyond the unemployment rate and the employment-to-population ratio to what they call the utilization-to-population ratio. That measure, which they call the “ZPOP,” is defined as “the share of the working-age population that is working full time, is voluntarily working part-time, or doesn’t want to work any hours.”
Currently, that is about 91 percent of the working-age population. The remainder, currently about 9 percent, “are a roughly even mixture of the unemployed, those not in the labor force but wanting to work, and those working part-time but wanting full-time hours.”
The ZPOP is “currently about 1.5 percentage points below its prerecession level” of around 93 percent. When the ZPOP was at that level, just before the 2008 market crash, the overall unemployment rate was hovering around 4.7 percent. As their chart shows, the ZPOP almost reached 94 percent before the 2001 recession, which ended a period of 4 percent unemployment.
There’s a lot of wonkery here, but their conclusion is simple: The economy is in a far better state than it was during the recession at fully utilizing its labor force, but there is still in their words “some way to go.”
Mark Thoma at CBS Moneywatch makes the point that even this measure falls short in measuring the true state of the job market. “Just because a worker is employed doesn’t mean he or she is doing what they’re best at or employed in their most productive occupation,” he writes. “If an unemployed engineer takes a job waiting tables to feed the family, that worker will be defined as fully employed, but that worker’s potential is hardly fully utilized.”
He goes on to write, “Measuring how well workers are matched to jobs is extremely difficult, but it’s a consideration worth thinking about when trying to figure out how close the economy is to its potential output.”
That’s why the best policy would be to ignore the economists and policymakers who look at 5 percent unemployment as a signal to declare that the job market is healthy. Full employment is nothing less than every person who wants a job being able to find a job – especially the kind of job for which they are suited at the wages they deserve. Anything less wastes the potential of millions of people who are on the economy’s sidelines – and that reality demands far more of our attention than conjured-up fears of inflation.