Is That All There Is?

How Full Is Our “Full Employment”?

By Max B. Sawicky

There’s more than one reason to get jacked up over the Republicans’ epic deficit orgy of 2017–18. One that deserves closer scrutiny is the view that since the economy is at full employment, this is the wrong time for deficits to increase. The temptation to lambaste the G.O.P. for its deficit perfidy may be overwhelming, but it could also be both bad economics and bad politics.

On the economics, Catherine Rampell asserts in The Washington Post, the new increases are “breathtakingly ill-timed.” Barack Obama’s chief economist, Jason Furman, on his Twitter feed, sees “an essentially full employment economy.” Paul Krugman asserts the salience of trade concerns at currently low unemployment rates “has essentially evaporated.”

Professor James Stock of Harvard, a member of Obama’s Council of Economic Advisers, told this writer himself some years ago, before a lot of subsequent job growth, that the recession-based, cyclical employment problem was basically solved for the time being. Stock and his co-authors described the unemployment rate in 2017 as “normal,” which is econospeak for its “natural,” long-run, lowest sustainable rate. “Sustainable” in this context means a rate that falls short of setting off undesirable increases of inflation.

These are not inconsiderable authorities, but they are not the only ones, and theirs is not the only view. A prominent counterpoint can be attributed to another Obama Administration stalwart, Jared Bernstein. In his blog On the Economy, Bernstein surveys the evidence for current slack in the labor market, meaning the capacity for growth in employment.

To begin at the beginning, the headline metric usually cited as an index of economic health is the unemployment rate. We can immediately dispense with canards over whether this rate as calculated by the Bureau of Labor Statistics (BLS) is “real.” The rate could not be any more real, in terms of its faithfulness to the underlying definition. The BLS is copiously transparent in its methodology. That definition is the number of those surveyed as looking for work divided by the entire labor force, which consists of those looking and those working. The most recent BLS Employment Situation Summary reports a rate of 4.1 percent for the month of January 2018.

The issue with the unemployment rate is not whether it is accurate. Given its definition and resources devoted to its calculation, it is as accurate as humanly possible. The question is what to make of it.

We should note that there are actually six ways the BLS calculates an unemployment rate. One is free to choose one’s favorite, but none of them speak fully to the concerns that will be ventilated here.

The most prominent oversight in the most commonly quoted “official” rate (“U-3” in BLS code) is the neglect of those who might work but for one reason or another are not looking for work. This turns out to be a murky category of people. If somebody isn’t looking for work, would they really work under other circumstances? The U-3 measure punts on this question for the sake of a less ambiguous measure, excluding everyone who doesn’t measure up to their criterion of “looking for work.”

In the realization that U-3 doesn’t tell enough of the story, the BLS attempts to remedy it with further rates (U-4 and U-5) that use the Current Population Survey to count what are called “discouraged workers” and those who are willing to work full-time but only work part-time, called “those marginally attached to the labor force.”

These measures may not tell the whole story either. The simplest proof is that the ratio of those employed relative to the population (employment-population ratio, or ‘EPOP’), both relatively unambiguous variables, was higher in both 2000 and 2007. An aging population explains some of the erosion in the rate over time, but not all of it. Data on workers classified as “prime age” (ages 25 to 54), shows the same pattern. The implication is that none of the unemployment rates capture those who worked in 2000 and 2007 but who now appear to be neither working, nor classified as discouraged or marginally attached to the labor force.

That’s why in recent times the unemployment rate has increasingly been discounted as the definitive indicator of labor market slack. Going by a simple comparison, today’s EPOP of 60.1 percent is inferior to the rates in past years, suggesting a continuing failure of the economy to attain its potential.

Obama’s economists would probably agree that some of those who are not included in the labor force numbers would indeed be working, if not for structural factors such as lack of educational attainment. Where they are vulnerable to criticism is in discounting the fluidity of the employable labor force, not least in response to celebrated market incentives. In an economy with a rising demand for labor and upward pressure on wages, chances are that more of these people would end up working, structural impediments be damned. This is indeed what happened in the latter ’90s, as estimates of the rate to which unemployment could sink without ruinous hyper-inflation had to be repeatedly adjusted downward by our most learned authorities.

There turned out to be more slack in the labor market than the elite of the economics profession imagined. This was one of the great, unheralded scandals of mainstream economics. Worse, this oversight was revealed by none other than the thinly-credentialed economist Alan Greenspan, in his capacity as head of the Federal Reserve Bank. Greenspan went counter to conventional wisdom by failing to juke up interest rates as employment became fuller than full.

In 2000 the EPOP for prime-age workers got as high as 81.9 percent. The most recent rate is 79.0. A difference of one percentage point in terms of the 2017 prime-age population is well over a million people. Shouldn’t these folks be working? Was there some rash of new college students? A national, mass attack of laziness? Were people just too rich to bother jumping back into work, after the Great Recession, but not too rich at the height of the economic boom?

The Economic Policy Institute (EPI), my old stomping ground, issues periodic estimates of “missing workers” — those not counted as either working or unemployed. Their most recent estimate was in July of 2017 and came out as 1.5 million people. These were people counted as neither working nor looking for work, but likely to work if given the opportunity. The difference in the unemployment rate at that time would have been .8 percentage points, at that time a large difference in the official unemployment rate of 4.4 percent. Now the rate is 4.1 percent, which in terms of the July ’17 differential of missing still leaves a sizeable number.

Another way to gauge labor market tightness is to consider wage trends. As the number of available, employable workers declines, employers must go to greater lengths to expand their workforce. That means more favorable offers of wages, benefits, and hours. If employers can obtain new workers at old wage rates, there is likely to be a surfeit of available job applicants. Hence, labor market slack.

We observe very little in the way of wage gains over the course of the post-2008 recovery. An informative graph of median earnings by race and gender is here. It shows little progress of earnings since 2000, in inflation-adjusted terms. Moreover, the gap between wage growth and productivity growth persists. Why is this important?

If workers produce more than they cost the firm, employers should want to expand with more workers. To get these workers they should need to offer more pay. But we don’t see more workers or more pay, relative to previous high points in the economy. That suggests unused national economic capacity, needlessly idle hands, and needlessly depressed family incomes.

Thus far we’ve been talking about full employment, or its lack. We could also consider the question of full output, known as “potential GDP.” Is the economy running at maximum capacity? There is much evidence to the contrary that is cited by Bernstein and elaborated in a more technical survey.

The upshot of the paper linked above is that we could be foregoing GDP at somewhere in the range of five to eleven percent. If we extrapolated that to the size of the employed labor force, officially and conservatively speaking, each percentage point is over a million workers.

There is one more limitation of all these numbers. They are founded on a count of what’s called the “civilian non-institutional population.” In the context of this argument, the relevant missing group is the nation’s “institutionalized,” incarcerated persons.

It is well known that by this metric, America is among the world’s leaders, along with such advanced civilizations as Russia and Turkmenistan. Fortunately, we don’t execute very many of them on an annual basis. I suggest two implications of this reality.

First, the level of a nation’s incarceration reflects negatively on the success of its society. To the extent, for whatever reason, individuals choose to violate the law, or worse, innocent individuals are incarcerated or receive excessive sentencing, the implication is of an economic and social system that is not functioning as well as it might.

Second, the racial bias in incarceration is well-known. When we speak of “full employment,” we implicitly write off the incarcerated, just as we do those who are not classified as part of the labor force. In this respect, “full employment” in the U.S. is both a racialized and gendered concept. Adherence to a narrow concept of full employment is a facet of institutional racism and sexism in America.

It happens that the institutionalized, automatic response to unemployment in the U.S. is weak to begin with. The mandate of the Federal Reserve to promote full employment is not reflected in its policies. Even now, with apparent slack in the labor market, the Fed appears intent on raising interest rates to reduce the rate of growth of employment and wages.

Given the disproportionate effect of “missing workers” on minorities and women, acting on the official unemployment rate would still reflect a racialized, gendered failure. The racial angle is compounded by the state of incarceration.

Another angle on the biases of unemployment discourse is the attention afforded to differences in rates by race. The most recent numbers show an unemployment rate of 3.5 percent for whites, and 7.7 percent for African-Americans. There is nothing new in these differentials. What we might ask, however, is why the African-American rate couldn’t be 3.5 as well.

If the African-American rate is lower, does that mean the white rate must be higher? That would depend on the dubious proposition that there is a fixed amount of total potential employment. There is certainly a limited supply of labor, but there is no reason why African-Americans residing in the 4.2 percentage points of difference could not also be working. There is no reason why output could not increase to provide the consumer goods that these additional workers could buy.

A third aspect of racialization is the assumptions about immigration. In the most primitive versions of our public debate, immigrants are coded as non-white, or “other.” The demand for labor in the U.S. clearly affects incentives for immigrants. Insofar as policy accommodated immigrant families and their workers, employment rates and EPOPs could rise. Insofar as we take the current state of the labor market as nirvana reflects on our hospitality towards those who would dearly benefit from employment in the U.S., including related family members who are here already.

In these ways, the economics and politics of class, race, and gender are deeply intertwined.

The policy implications of missing workers of various types are straight-forward. Now is the wrong time for the Fed to step on the brakes by raising interest rates. It is also the wrong time for deficit reduction.

The irony is that, notwithstanding their hyper-ventilating about the national debt, Trump and the Republicans are proving perfectly willing to increase it, with both tax cuts and spending increases. This dissonance naturally drives Democrats to distraction, so stark is the divergence of deeds from words.

But the response that “this is the wrong time to increase the deficit” is problematic, for the economic reasons we have related above. Although Trump’s deficit is not well-designed as economic stimulus, if we could say it is “designed” at all, the fact is that it is more likely to have positive than negative effects for the next few years. There remains some slack in the labor market. With more sensible policies on decarceration and immigration, there could be more still. The social benefits of high employment and tight labor markets are legion.

Whatever its egregious shortcomings from the standpoint of economic justice, the Trump economy might not turn out so badly in the short term. Apocalyptic predictions to the contrary could end up looking very foolish, and looking foolish is bad politics. Moreover, the “full employment” meme is a bad look for those seeking to maintain a critical stance towards institutional racism and sexism in employment and law enforcement.

We’ve just come into and are now coming out of a significant stock market “correction.” There was some momentary excitement over inflation in the stock market on February 14th, based on a single monthly data point. The Dow Jones Average fell 120 points, to 24,544; but this lasted for only 30 minutes. The index ended the day at 24,885. We also have the approval of the stimulative two-year Trump-Republican Federal budget under a bipartisan agreement that precludes imminent government shut-downs or debt ceiling confrontations. Employment and wages are both growing. The stock market might well recover to its prior, bubbly trajectory.

Democrats should cheer up; it could be worse, because things could be even better. They will have to raise their game to capitalize on the myriad faces of Republican dysfunction. We have to hope they will not succumb to their own, habitual exaggerations of the harmful effects of budget deficits, and the concomitant, racialized, gendered notions of the limits of the nation’s economic potential.