The U.S. expansion has put millions of people back to work and economists agree that the economy is now at or close to full employment. But what does that mean exactly? When economists talk about full employment, they don’t mean everybody has a job. And they don’t mean that even the rosiest economic health can cut unemployment to zero. If unemployment falls too much, inflation will rise as employers compete to hire workers and push up wages too fast. To economists, full employment means that unemployment has fallen to the lowest possible level that won’t cause inflation. In the U.S., that was thought to be a jobless rate of about 5 percent — above the February rate of 4.1 percent. Is higher inflation therefore on the way? Or is full employment a smaller number than economists supposed?
Since the U.S. recovery began in 2009, total employment rose from 138 million to 154 million by the end of 2017. The number of unemployed has shrunk to fewer than 7 million from 15 million. As the labor market tightens, the Federal Reserve is debating the timing of its next rate hikes. The problem is that there’s more uncertainty than usual over how many people want jobs, making it hard to pinpoint how much unemployment has to be tolerated to fend off inflation. That’s because the last recession was exceptionally severe and has shaken up the labor market in ways that aren’t well understood. U.S. Treasury Secretary Steven Mnuchin argues that a fuller unemployment measure should include “discouraged workers” who have stopped looking because they thought there were no openings. That rate, the BLS’s alternative U-5 index, tends to run a full percentage point higher than the commonly cited U-3 index.
The government counts as unemployed people who don’t have a job, have “actively looked” for one in the previous four weeks, and are available for work. A wider measure of people needing work would count other potential job-seekers as well. The Bureau of Labor Statistics reported that 1.6 million people were “marginally attached to the labor force” in February — meaning they wanted a job and had looked for one in the previous 12 months, but not in the past four weeks. This included 373,000 discouraged workers. The number of marginally attached surged in recent years partly because the recession was so deep and long; it’s likely to shrink as the expansion continues. Other kinds of disguised unemployment may be temporarily high as well. In February, 5.2 million of the economy’s 27 million part-time workers wanted a full-time job. A stronger economy might also draw back into the labor force people who retired sooner than they’d intended, or who chose to stop working for other reasons.
Economists, including the Fed’s policy makers, are divided about how close the economy is to full employment. To discourage inflation, some think that short-term interest rates should rise again soon and that plans to reduce the central bank’s holdings of bonds should be sped up. Others think that rates should be held lower, not least because inflation is still below the Fed’s target. Some economists think that the official rate of unemployment can fall further — say, to 4 percent — before inflation concerns need to be addressed. Others say that changes in wages may be a clearer indicator of labor-market conditions than the post-crash unemployment rate. Wages are showing only hesitant signs of faster growth. The Fed’s big concern: It’s possible that we won’t know what full employment means until inflation takes off.