The Labor Market That Could

By Jack McCabe

As the economy chugs along on its way to becoming the longest expansion on record, the labor market continues to power on. For an expansion that is as long in the tooth as this one is, the resiliency of the labor market in consistently producing more jobs is impressive. Over 2.6 million jobs were added in 2018 as the unemployment rate dropped to a near half-century low of 3.7 percent. Jobs are plentiful, as evidenced by the fact that roughly 75 percent of new entrants to the labor force are finding employment right away and the voluntary quits rate remains elevated.

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Buoyed by low interest rates and other accommodative monetary policy from the Federal Reserve, businesses returned to hiring to meet the increased demand for goods and services over the last decade. Even as the unemployment rate has dropped below most estimates of full-employment—that is, to the point where “the labor market is as tight as it can be without runaway price rises”—there have been no clear signs of inflation breaking out to the upside. There appears to have been more slack in the labor market than previously believed, as millions of Americans have found gainful employment and many more have returned to the labor force in search of work.

An important group to analyze in determining the strength of the labor market is the 25-54 age cohort, commonly referred to as “prime-age.” This is the bulk of the working-age population and focusing on this group helps to control for the aging of the workforce. As of this writing, the labor force participation rate for this group had just about returned to its 2005-07 average of 82.9 percent, while the employment-to-population ratio has recently surpassed its 2005-07 average of 79.7 percent. These increases were largely driven by prime-age women re-entering the labor force over the last three years. Neither measure has returned to the highs seen in the late 1990s, but the fact that they have just reached their pre-recession averages signals that there was indeed still some slack in the labor market.

Additionally, the strength of the labor market has manifested itself in people who are typically overlooked now finding work. The unemployment rate for those with a disability has nearly halved, declining to 8 percent from a high of 15.4 percent in 2011. Likewise, the unemployment rate for those with less than a high school diploma has fallen to 5.7 percent from a high of 15.8 percent in 2010. The tightness of the labor market has led employers to expand their searches and consider candidates that they may have previously discounted.

As more jobs continue to be filled, there are fewer and fewer people to fill open positions. In fact, there is more than one job opening for every unemployed person, prodding employers to bid up for desired workers. Wage growth has recently accelerated to post-recession highs after lackluster growth for most of the expansion. As of late, the largest gains have gone to less educated, younger, and lower skilled workers. While this wage growth has been broad-based, it still lags behind that of previous expansions, consistent with some slack remaining in the labor market.

Developments in the labor market will be an important story worth monitoring over the next year. With the Fed’s turn to a more dovish stance, there may not be many more rate hikes in this cycle. As long as monetary policy does not turn restrictive, the opportunity remains to see just how much slack is left in the labor market.