The U.S. unemployment rate is sitting near levels usually
consistent with a healthy labor market. Federal Reserve officials this week
will assess whether this time is different. Their conclusion about the labor
market’s true health could shape the central bank’s signals to the public
Wednesday at the end of a two-day policy meeting. It’s also likely to become a
focal point for investors in the coming months as the Fed weighs when to start
raising interest rates—perhaps as early as June.
The nation’s jobless rate has fallen steadily in recent
years to 5.5% in February. That is at the top of the 5.2%-to-5.5% range many
Fed policy makers consider to be full employment, or the rate the economy can
sustain without stoking too much inflation.
But other job-market measures suggest the labor market isn’t
that tight. Wage growth remains tepid, a reflection of relatively weak demand
for labor. A historically small share of Americans are working or looking for
jobs. And a broader unemployment measure from the Labor Department, including
people who have given up looking for work and those stuck in part-time jobs,
remains elevated compared to the official measure.
Those are among the worries of Fed Chairwoman Janet
Yellen and her colleagues. If the economy is indeed at full employment and
they wait too long to raise interest rates, they risk letting inflation take
off. But if there is more slack in the labor market than the jobless rate
suggests, they could lift rates too soon and crimp the recovery.
Average hourly earnings have grown just 2% over the past
year, and the labor-force participation rate is hovering near the lowest levels
since the 1970s. Those figures are odds with an economy approaching full
employment. A smaller supply of available labor should be putting upward pressure
on wages, which in turn should draw Americans back into the job market.
The disconnect is shown in the broader U-6 reading, which is
5.5 percentage points higher than the most common gauge of unemployment. In the
decade before the recession began in late 2007, the average spread was 3.6
percentage points.T he gap has narrowed by 0.4 percentage point over the past
year, but remains stubbornly wide. The gap suggests that despite steady job
creation, an unusually large number of Americans are underemployed or on the
fringes of the job market.
Economists Andrew Levin and David Blanchflower calculate the
disparity in a different way. They developed the “employment gap,” which
measures unemployment, labor-force participation and underemployment against
expectations consistent with full employment.
By their measure, the U.S. economy needs to add about 2.8
million full-time jobs to return to full employment. To do so, employers would
need to add jobs at near the same swift rate averaged over the past 12 months
for another year. But Fed officials have hinted their first rate increase could
come in the next few months. Mr. Blanchflower, a Dartmouth College economist,
and Mr. Levin, a former Federal Reserve Board staffer for two decades, are
skeptical.
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