Job growth at full employment (October 3, 2015)
The Bureau of Labor Statistics reported that the number of payroll jobs in the U.S. increased 142,000 in September, which was well below the consensus estimate of at least 200,000. At first blush, market commentators suggested that this disappointing number would force the Federal Reserve to wait even longer to raise rates. I disagree. In particular, I do not find 142,000 new payroll jobs disappointing for an economy at or approaching full employment and the Fed should not either.
Full employment is defined generally as that point where everyone who wants a job has one. That does not mean that the unemployment rate is zero because there are always some degree of frictional unemployment in place. Frictional unemployment is defined as the unemployment that occurs because of people moving or changing occupations. Recall that there are on average at this stage of the expansion about 5 million hires a month, but this time around there are over 5.7 million job openings a month (see Chart 1). In other words, there is a lot more moving and changing than the 142,000 of new jobs a month alone would suggest. Moreover, there are some people who are permanently unemployed—those always looking for work but never find it.
Under such circumstances, the civilian unemployment rate that seems consistent with full employment in the U.S. is probably around 5 percent. The unemployment rate in August and September was 5.1 percent. Once the economy reaches full employment, then the number of new jobs likely to be filled should roughly match the number of new workers entering the labor force. Of course, the payroll employment data measures the number of jobs, while the household data measures the number of people employed regardless of how many jobs they may have. Nevertheless, assuming that all the people who want a second job have one, then the number of new jobs available will be limited roughly to the number of new workers entering the labor force.
According to the September employment report, the labor force grew 0.56 percent from a year earlier, or 876,000 people. This translates into a gain of only 73,000 a month. Although there is considerable debate about why labor force grown has slowed so markedly, there is little evidence to suggest that it will accelerate anytime soon as claimed by some economists. I have said repeated over the last several years that it is the aging of the population and retirement that have contributed markedly to the slowdown in labor force growth.
Hence, at full-employment, job gains in excess of 73,000 a month could be more than enough to provide jobs to anyone entering the labor force, which in turn would keep the economy fully-employed. Obviously, the unemployment rate can fall below 5 percent, but it is unsustainable at that lower level. In the past, such an extremely low level of unemployment has been correlated with excesses—the proverbial "too much of a good thing." It is interesting how often too much of what is perceived at the time as a good thing ends up being not so good. Housing and mortgage debt from 2005-2007 are good example.
In September, payroll jobs increased 142,000, which is twice the level needed to provide jobs to labor force entrants. The implication is that the unemployment rate, which has fallen more than one percentage point in each of the last two years, will continue to decline but at a somewhat slower pace. In this regard, I continue to expect the civilian unemployment rate to drop below 5 percent by the end of this year and to a level near 4.5 percent by the third quarter of next year.
As such, the Federal Reserve should not be dissuaded from its policy decision to raise shortterm interest rates this year. If fact, based on the changing U.S. demographics, it seems that payroll job gains of 142,000 a month are more than enough to encourage the Fed to shift to a less accommodative monetary policy.
Daniel E. Laufenberg, Ph.D. firstname.lastname@example.org
October 3, 2015
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The views expressed here reflect the views of Daniel Laufenberg as of the date referenced. These views may change as economic fundamentals and market conditions change. This commentary is provided as a general source of information only and is not intended to provide investment advice for individual investor circumstances. Past performance does not guarantee future results.
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