Assessing the health of the U.S. labor market is an important concern of economists and policy makers. The Great Recession cut household employment by 8.6 million jobs from November 2007 to December 2009. Since the nadir, we have gained back about 6.4 million jobs, leaving us still about 2.2 million jobs short of the pre-recession peak. Given that we are still below peak employment, how bad is the labor market now? This is a very important question because the Federal Reserve has explicitly linked monetary policy to labor market metrics by way of the 6.5 percent unemployment rate “threshold” for the fed funds rate. In the minutes of the December 17/18 FOMC meeting, we see that fed officials are backing away from a hard unemployment target for the fed funds rate. This is a good thing because the unemployment rate is not showing us the whole labor market picture.
The U.S. unemployment rate of 6.7 percent in December is indicative of a labor market with too much slack, and that means underemployment and hardship for many households. However, other, more obscure labor market indicators show that the labor market may be tightening up in ways that the overall unemployment rate is not showing.
The first graph shows an approximate calculation of the percentage of working age adults that are choosing not to work. That percentage obviously increased post-2009. This suggests that the current weak labor force growth is not entirely due to a weak economy, or even due to the retirement of the early baby boomers. Rather, we can say the opposite. Weak labor force growth is at least partially due to an economy strong enough to support a growing percentage of non-workers.
The second graph shows the quits rate per worker for all nonfarm jobs. That rate is also steadily increasing post-2009. Workers are gaining confidence that they can move on to something better, even with a 6.7 percent unemployment rate.
An extraordinarily bad economy requires extraordinary monetary policy. But now that the economy is showing some improvement, we have the task of assessing the health of labor markets in a more nuanced way.
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