Markets and Economy
What Unemployment Metrics Don’t Show
With short-term unemployment at the lowest level ever recorded, it’s natural to think the economy is running out of workers. But official measures don’t reflect hidden pockets of unemployed, including part-time workers and up to 1 million young adults who have yet to join the workforce.
No single labor market statistic can fully capture the current state of the American workforce. The headline unemployment rate only counts jobless workers who are actively searching for new employment, leaving out millions who have left the labor market but are likely to return as conditions continue to improve.
With short-term unemployment at a record low, some analysts are concerned the economy has run out of workers. But even the broadest measures of unemployment still leave out a significant population of young adults who left the workforce—and up to a million of these workers could soon return to the job hunt en masse.
Only Part of the Picture
The headline unemployment rate provides a useful measure of labor market conditions, but it doesn’t reveal much about the economy’s capacity for future growth. Spikes in short-term unemployment are a clear sign of weak demand for labor. Conversely, the current historically low level of short-term unemployment indicates that businesses are hiring rapidly—most job candidates do not have to search for long before they find an employment opportunity.
But the dwindling population of short-term unemployed workers does not necessarily suggest that the economy is on the verge of overheating. As long as alternative sources of labor market slack exist, businesses should be able to continue expanding and creating jobs without sparking an inflationary spiral. Even the broadest measures of unemployment provide only a limited view of the economy’s underlying capacity.
Who’s Missing From the Count?
Although the population of idle workers is declining rapidly, several important sources of labor market slack remain. For example, 5 million involuntary part-time workers are eager to take full-time positions as they become available. The broadest measure of unemployment (U-6) is always quite high, since it includes a large population of marginally attached workers—or those who are marginally interested in a job but aren’t actively looking for one—who may never actually return to employment. Involuntary part-timers, by contrast, are a reliable source of new labor—these workers obviously possess the skills necessary to meet employers’ needs.
The population of involuntary part-timers has fallen back to a historically normal level, at about 3 percent of all workers. There is no reason to believe their ranks won’t dwindle further as the economy continues to create new full-time opportunities.
The Youth Barometer
Eventually, young workforce dropouts should also serve as a significant source of new workers. The workforce participation rate for Americans ages 20 to 24 has fallen several percentage points from its pre-recession peak. While participation has rebounded somewhat from its 2015 low, as many as 1 million discouraged workforce dropouts may still return to the labor market as jobs become available. Notably, the population of young workforce dropouts pursuing further education is not included in any Bureau of Labor Statistics unemployment survey. They are not even counted among the marginally attached population of jobless workers; once they are back in school, they wouldn’t be inclined to take a job even if one were available.
As this population completes their degrees and re-enters a more welcoming job market, the labor force participation rate for young adults should slowly climb back toward historical norms. This could signal that the economy is finally nearing its true potential—but the labor market won’t have truly tightened until these 1 million young adults return to the job hunt.
A Patient Approach
The Federal Reserve has been sensitive to the fact that unemployment statistics only provide a partial view of the labor market. The recession was so severe that it led to an unprecedented number of discouraged workforce dropouts; now that hiring has returned, the hidden unemployment problem is fading.
As long as inflation remains tame, there is little reason to believe the economy is closing in on its full potential. As demand for labor continues to grow, these pockets of labor market slack should provide the new workers necessary to fuel further economic growth.
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