Ed Dolan's Econ Blog

As Unemployment Rate Hits a New Low, More Slack Remains in the Labor Market than Meets the Eye

The Bureau of Labor Statistics reported today that the unemployment rate dropped to 5.6 percent in December, a new low for the recovery. For the first time in years, the unemployment rate has fallen to the range of 5.25-5.75 percent that the Fed considers consistent with its mandate to maintain full employment.

In the same release, the BLS reported that payroll jobs increased by a robust 252,000 in December. On top of that, it made upward adjustments totalling 50,000 to the already-strong job gains for October and November. That brought the 12-month gain in payroll jobs to 2,952,000, the best annual gain since 1999.

These latest data raise a critical question: How much slack remains in the US labor market? Is it time to start tightening policy to forestall an outbreak of inflation, or is there room for employment to expand further without inflationary pressure? To answer these questions, we need to look beyond the headlines to some of the less familiar indicators of the employment situation.

Involuntary part-time work as hidden labor-market slack

One potential source of labor market slack consists of people who are working part-time “for economic reasons,” as BLS terminology describes them. That category, more often referred to as “involuntary” part-time work, includes those who can only find part-time jobs or whose employers have cut the hours offered for what would normally be a full-time job. In December, there were 6,790,000 involuntary part-time workers, or 4.3 percent of the labor force.

As the chart shows, involuntary part-time work is cyclically sensitive. The number of such workers has fallen from a peak of 9.3 million in the depth of the recession. However, there is still a significant amount of slack here. In June 2008, which is the last time the official unemployment rate was as low as 5.6 percent, involuntary part-time workers made up just 3.6 percent of the labor force. Given the size of today’s labor force, returning to that rate would mean moving more than a million workers from part-time to full-time status—a significant increase in the total labor supply.

Marginally attached workers as labor market slack

Another important source of labor market slack consists of people who say that they want a job, but are not currently in the labor force or counted as officially unemployed. (In BLS methodology, you can’t be counted as unemployed unless you are in the labor force, and you can’t be in the labor force unless you are either working or have actively looked for work during the past four weeks.) As the next chart shows, would-be workers who are outside the labor force fall into several categories. The BLS does not provide seasonal adjustment, so 12-month moving averages are used to smooth seasonal fluctuations.

The narrowest category, known as discouraged workers, are people who want to work and are available to take a job, but have not looked because they think it would be pointless to do so. They may think there are no jobs at all, that their skills are not suitable for jobs that are available, or that employers will find them too young, too old, or be prejudiced against them for some other reason. As the chart shows, this category is cyclically sensitive. People in this group have already begun returning to the labor force as the recovery and expansion have proceeded. However, the number of discouraged workers is not yet back to its pre-recession level.

Marginally attached workers are a somewhat broader category. They are people who would like to work and have looked for work within the past year (although not within the past month), but are currently not working because of school, family responsibilities, illness, transportation problems, or other reasons. Some marginally attached workers are already returning to the labor force; the number in this category peaked in November 2011, a year after the peak for discouraged workers.

The third and largest category is even more loosely attached to the labor force. It consists of people who say that they would like to work but do not fall into the marginally attached category because they have not looked for work for more than a year. Many of them remain hopeful that they will be able to find work, at least part time, at some point in the future. However, as the chart shows, the number of workers in this category remains higher than it was in 2010, the peak year for the standard measure of unemployment.

How realistic is it to think that increased labor demand and more aggressive recruitment by employers would draw more of these workers back into the labor force? A recent poll conducted for the Kaiser Family Foundation, the New York Times, and CBS News sheds some light on that question. Here are some of its key findings:

  • Among those who consider themselves unemployed, even if they do not meet the official definition, a majority say that they would make significant sacrifices to obtain work, including taking an entry-level job in a new field, returning to school or training, working nontraditional hours, making a long commute, or moving to another city.
  • Many who are out of the labor force identify themselves as homemakers. In contrast to other groups, a majority of these report that they are financially secure even without a job. Still, most of them see it as likely that they will work in the future. Interesting work and flexible schedules are among the factors that would more quickly draw them back into the labor force.
  • Many of the non-employed report some degree of disability, in some cases precluding any possibility of work. However, about a quarter of the disabled think that they would be able to work, at least part time, if an employer made appropriate accommodations. As the labor market becomes tighter, the willingness of employers to do so will presumably increase.

The survey, then, makes it reasonable to think that the six-million-odd people who are out of the labor force but say they want a job really do represent a significant reserve pool of labor. In mid-2008, which is the last time the unemployment rate was as low as 5.6 percent, that pool was smaller by at least a million and a half workers.

The bottom line

On the whole, then, it appears justified to think that the current official unemployment rate significantly understates the degree of labor market slack. Millions of part-time workers are ready and willing to switch to full-time jobs, and millions of others who are not working at all say they would like to join the labor force. If so, the recovery has a considerable way to go before the Fed need feel compelled to take away the punch bowl. At the same time, though, the large amount of hidden slack may disappoint those who hope for a rise in long-stagnant earnings, which have struggled just to keep up with inflation in recent years.



10 Responses to “As Unemployment Rate Hits a New Low, More Slack Remains in the Labor Market than Meets the Eye”

rjsigmundJanuary 10th, 2015 at 1:15 pm

2014 will go into the record books as seeing the greatest job creation since 1999, and the greatest private job creation since 1997…furthermore, there were less layoffs in 2014 than in any year since 1997, and there were fewer first time claims for unemployment per capita in the fourth quarter than in any quarter in US history…add to that the fact that the 3rd quarter saw the fastest economic growth since 2003, and that without an inventory buildup…

so, ed, can it get any better than that?

middlemollyMarch 10th, 2015 at 8:33 pm

"Going in the right direction" in a well-maintained, good car on good roads is a good thing, but it doesn't mean that we are there yet. We still don't know what might await us around that next bend in the road.

BenL8January 11th, 2015 at 4:50 pm

Private sector employment since Jan 2001 has increased at a rate of 39,000 jobs a month for a total of 6.5 million more jobs, from about 112 million to 118 million, an increase of less than 6 percent in 14 years. (at data bls, private sector employment) Enlarge that bls graph and start from 1939 and you get a better view of the shift. For eleven straight years there was a net zero increase, from Dec 2000 to April 2012. How much did the age 20 to 65 population grow? I don't know, but the Civ. Noninstitutional pop. grew by 16%. Now, I look at the 25 to 54 year old group, up by 3 percent, from 12.01 to 12.14. (St.Louis Fed, FRED graphs) I still think the under-employment is about 22 million. has an employment article monthly, it explains why. You'll see that 25% are un- or under-employed or working full-time year-round for below poverty. That's slack and lousy pay.

middlemollyMarch 10th, 2015 at 10:30 pm

The 22 million number is absurd. We've ALWAYS had millions of "involuntary" part-timers and millions of people who "want to work" but haven't bothered to look for work. Going back 40 years, we've never had fewer than 3 million involuntary part-timers. And there are STILL only 6.6 million people who say they "want a job". From looking at the BLS tables, it looks as though the overall civilian non-institutional population grew by 13.6%, but the 25-54 age group (the group considered the "prime aged" workers) only grew by half a percent. Now the 55-64 age group did grow by a whopping 56% over that time, but the labor participation rate of people 55-64 is quite a bit less than it is for people 25-54. It is very clear that we aren't anywhere close to the boom years of the 90's… and not even close to the boom years of the 60's and early 70's. But things are quite a bit better than they were five years ago. I personally don't know anyone who was unemployed 4-5 years ago who has not either found decent work and/or aged into retirement. At least around here, the suffering is simply not happening.

middlemollyMarch 10th, 2015 at 8:32 pm

A sincere thanks for an intelligent, readable article. I'm tired of reading about "people dropping out of the labor market in misery and discouragement" whenever the number of people in the labor force decreases. The situation is, as you have described, much more complex. I also had not seen that Kaiser/New York Times study, and I appreciate that link.

I think that "slack" in the labor market is a much better term than "hidden unemployment" or even alternate unemployment. People can talk all they want about "wanting" a job, but unless they are actually out there looking, they aren't unemployed. I'd like to see some stats on the numbers of people who say they "want a job" who actually do wind up looking for work or working in six months, a year, or more. I don't believe the CPS (Current Population Survey) keeps track of those numbers.

I do have a comment to make about this: "Among those who consider themselves unemployed, even if they do not meet the official definition, a majority say that they would make significant sacrifices to obtain work, including taking an entry-level job in a new field, returning to school or training, working nontraditional hours, making a long commute, or moving to another city." Hmm.. Seems to me the first thing the people who do not meet the "official definition" should do is actually LOOK FOR A JOB. I'll have to dig into the Kaiser report to see if they ask these desperate, willing people why they are not looking for work, the first step to actually finding a job. Why talk about "significant sacrifices" if you aren't looking for work? Particularly since the unemployment situation has improved significantly over the past two years. And the rest of the people, the people actually looking for work, are counted among the 5.5%.

I do agree that there is still quite a bit of slack in the labor market, but I really do wonder how many of those people who say they want a job will ever really jump back in. From the CPS Table A-38, the breakdown of people not in the labor force, there are about 500,000 more people now vs. a year ago who say they want a job but have not looked for work in the past year. Most of this increase is in the 55+ age group.

A few other things we know about labor dropins and dropouts: We know that, for every unemployed person who "drops out" of the labor force, right now about 3 people "drop in" and either start working or looking for work. That's the highest this ratio has been since mid 2008, which is a good thing, but mid 2008 was not a great time. That ratio actually hit 4.4 in late 2000, so there's a lot of room for MORE people to "drop in" if possible.

And, of the people leaving the labor force, 66% were people who were previously EMPLOYED (vs. people who were previously UNEMPLOYED). That's also the best percentage since mid 2008 — but fairly far off from the 75% of late 2000, despite so many more people retiring.

So we are certainly moving in the right direction, but we still have a way to go.