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Labor Market Has Long Climb to Full Employment

Full Employment
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EDITOR NOTE: When you’re starting from a point that’s negative the baseline, then any upward increase toward that baseline will look statistically impressive. That’s how to read America’s latest jobs report. However, we haven’t reached our baseline yet, as measured by pre-Covid full employment levels. We’re still around 9 million jobs short. And every Thursday morning, like we say today, we see over 700,000 new jobless claims filed in the previous week. That’s the difference between job gains and a strong labor market--we’re getting the former but far from the latter. As you well know, jobs are the backbone of our economy. Without adequate employment, economic growth is hampered. We are in a recovery period, but that’s likely to get stifled by other internal and external factors, from inflation to the questionable status of the dollar’s continuing dominance as the world’s reserve currency. So, in our case, we’re seeing both recovery and decline happening across different segments of our domestic and global economy at the same time. And while the stock market flashes hints of exuberance, the real economy experienced by the average American continues to sink further downward.

Despite the encouraging March jobs report, full employment remains far away. A simple way to see the depth of the jobs hole is the employment to population ratio, which accounts for both job loss and labor force dropouts. At 57.6 percent, it sits over 3 percentage points (representing over 9 million jobs) below the pre-pandemic level, which the Federal Reserve (Fed) has identified as a key marker on the path toward full employment. But consensus forecasts imply the ratio will struggle to return to 2019 levels despite strong gross domestic product (GDP) growth, reflecting industry shifts and the adoption of labor-saving technologies accelerated by COVID.

Full Employment

Additionally, full employment has taken on a new definition under the Fed’s new framework, with aggregate measures like the unemployment rate no longer sufficient in gauging labor market progress. Some Fed officials now say that full employment was not achieved even when the unemployment rate was 3.5 percent.

Closing labor market disparities is now an explicit objective of monetary policy, and these disparities often do not start to shrink until well into an expansion. With employment gaps between racial groups, wage levels, and educational attainment at relatively wide levels, it will take several years before the Fed is satisfied the “maximum employment” objective has been reached. With inflation also set to remain subdued, we believe Fed rate hikes are further off than the market expects.

Original post from Guggenheim

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