As the media and Federal Reserve continue to talk about the economy being at full employment, I thought it would be informative to consider more of the employment data than just the official unemployment rate.
First, let us start with the popular headline unemployment rate. I have discussed this in previous blogs, so a brief overview will suffice. On the surface, a headline 3.9% unemployment rate would seem to provide evidence the economy is at full employment. Since the Bureau of Labor Statistics (BLS) defines the official unemployment rate as those people who were actively looking for work in the four weeks leading up to their monthly survey, anyone who is out of work but was not actively looking for work is not unemployed — they just do not have a job. The more informative data may be in the broadest measure of employment. The broadest measure includes marginally attached people (i.e. discouraged, in school or training, military, or family responsibilities) and people who are working part-time but want full-time work. For perspective, if we look at the lowest unemployment rate during the last business cycle (December 2000) the official unemployment rate was 3.9% — same as now. The broadest measure was at 6.8% while today it is at 7.8%. The broadest measure suggests that perhaps we are not yet at full employment.
Another area to consider is the monthly Job Openings and Labor Turnover Survey (JOLTS) published by the BLS. What the headline data show — as of March 31, 2018 — is businesses have a record number of job openings. Jobs openings totaled 6,550,000. This compares to 6,585,000 total unemployed individuals. Digging deeper provides better information. The table below shows the number of job openings versus the number of unemployed for each major industry sector (Note: the number of unemployed does not equal 6,585,000 because the job openings survey does not include agriculture or self-employed while the unemployment survey does. To give a one-for-one comparison, agriculture and self-employed are not included)
|Difference (Unemployed vs Job Openings)|
|Mining & Logging||22,000||55,000||33,000|
|Wholesale & Retail Trade||900,000||960,000||60,000|
|Transportation & Utilities||293,000||241,000||(52,000)|
|Profession & Business Services||1,128,000||714,000||(414,000)|
|Education & Healthcare||1,271,000||619,000||(652,000)|
|Leisure & Hospitality||879,000||808,000||(71,000)|
Looking at this data on its own would indicate that construction and manufacturing should have no problem filling open positions since they appear to have surplus labor available. This does not reconcile with the fact that these two industry sectors consistently indicate a serious problem with finding qualified help.
The final area regarding full employment is the number of working age people not in the labor force. Looking at the headline data shows that the nation has over 95 million working age people not in the labor force. That might lead to the conclusion that there is a lot of labor available that just needs the incentive to join the labor force. Sifting through the data gives a different insight. Of the people not in the labor force, 95% do not want to work. The report does not provide clarity for the reason that they do not want to work but it does tell us who the people are that do not want to work: disabled, homemakers, retirees, students and voluntarily idle make up this data set. That leaves just over 5,000,000 people who are not looking for work but want to work now. Of that group, 3,000,000 did not look for work over the past 12 months. Why they did not look for work is not provided but some of the potential reasons could be: just reached the legal age for working, just graduated from school and have not started looking for work yet, gave up looking for work but now believe that conditions have improved sufficiently to warrant looking for work again. The remaining 2,000,000 looked for work over the past 12 months but did not look for work over the past four weeks (remember the definition of unemployed). There is data for this group. The reason this group did not look for work over the past four weeks were: childcare or transportation problems, illness or short-term disability, in school for training, family issues and too discouraged to look for work. Potentially, there are 5,000,000 people who could enter the labor force. If we use the extreme scenario — they all entered the labor force and did not immediately find work — then the unemployment rate would jump from 3.9% to 6.8%.
There is no clear-cut answer as to whether we are at full employment. As such, it is important to consider more than just the headline data. The reality is that there is probably more labor available than the 3.9% official unemployment rate would indicate but not as many as the full 5,000,000 who are not currently looking for work but want a job now.
The views of this post are the views of the author and do not necessarily reflect the views of Washington Trust Bank. Washington Trust Bank believes that the information used in this study was obtained from reliable sources, but we do not guarantee its accuracy. Neither the information nor any opinion expressed constitutes a solicitation for business or a recommendation of the purchase or sale of securities or commodities.
Steve Scranton is the Chief Investment Officer and Economist for Washington Trust Bank and is a CFA charter holder with over 30 years of investment experience with equities, tax-exempt and taxable fixed income securities. Steve actively participates on committees within the bank to help design strategies and policies related to client and bank owned investments. Steve also serves as the economist for the Bank and has been a featured speaker for both client and professional organization events throughout the Northwest.