According to David Doyle, an analyst at Macquarie Capital Markets, the U.S. economy could reach full employment within a year. My question is: is this all we need in order to say the U.S. labor market is strong? (Source: Bloomberg, May 14, 2015.)
U.S. Economy: How Full Employment Is Possible
Doyle’s method first estimates the number of unemployed workers and those that will join the workforce. This number is 21.1 million. Then, he calculates that the labor market needs to add 55,000 jobs a month to keep up with population growth.
Doyle’s conclusion says if nonfarm payroll growth is 250,000 per month, then the U.S. will achieve an unemployment rate of 4.9% in 10.8 months. And 4.9% is his estimate of the unemployment rate when there is full employment—meaning no one is out of work because of deficient demand in the economy.
Full Employment May Not Be the Ultimate Goal
Economists will likely have different views on what unemployment rate constitutes full employment. Full employment allows frictional unemployment, which is when workers are in between jobs. But that is okay here. The issue with a full-employment unemployment rate is that it is just a number and cannot cover the multi-dimensional labor market.
First, there are discouraged workers. This is when workers give up on job searching because they could not find employment or they believe there is no job for them. The worst part is, they are not in the labor force and hence do not count as unemployed.
Second, there is the problem of underemployment. In April, there were 6.7 million people in the U.S. who wanted to work full time, but were only working part time due to the lack of available jobs. The underemployment rate—which takes into account the unemployed workers looking for work as well as those employed part time but wanting to work full time—is still near 11%. It has been above that percentage since September 2008. (Source: Bureau of Labor Statistics, May 8, 2015.)
Third, the unemployment rate does not tell us of the types of jobs gained. If we are adding more retail and restaurant jobs while losing manufacturing, mining, and construction jobs, wage growth will be limited.
Labor Market Remains Tormented
Full employment is supposed to be efficient. But the above three points suggest the lack of efficiency measures in the unemployment rate. One consequence of discouraged workers, underemployment, and gaining low-paying jobs while losing high-paying ones is a serious constraint on disposable income. A tight consumer budget will hinder growth in consumption, which makes up around two-thirds of our gross domestic product (GDP). Another consequence is more welfare payments, which would put even more pressure on the U.S. government.
Therefore, despite the potential reduction in unemployment rate, serious problems remain in the U.S. labor market.