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.