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The visual evidence of labor slack

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    We have discussed the so-called at or near full employment economy that we have today and I have been constantly pushing back on that narrative citing the number of folks taking jobs who were not considered in the labor force before they took that job and therefore not counting towards the unemployment rate before they started working.

    Here's a visual from FRED (all graphs courtesy of Warren Mosler at his blog):

    Here's the flows of people from employed to out of the labor force (not counted):

    Clearly, there is slack in the economy and the U3 unemployment rate is not an accurate reflection of labor tightness.

    Someway it became harder to be counted as in the labor force and easier to be counted outside of it when not employed.

    I don't work at the BLS so I can't tell you if their methodologies have changed or if estimation errors are the problem, or if the definition of labor force participation has 'narrowed,' but there are clearly a lot of people taking jobs who weren't in the labor force the day before and that means the U3 number is under-counting them, and they may not all be 'captured' by the U6 estimates.

    This goes a long way in explaining why we have not seen the expected wage and salary increases that accompany tight labor environments.

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    Thanks for sharing this Carlitos. Of course there are multiple factors affecting the trends that might not be apparent by just looking at the big pictures. As we have discussed in other posts, the economic recovery has been uneven both on a demographic basis (education and experience level, age, race, etc.) and geographic basis. We just don't have a pool of unemployed or under employed qualified people ready to step into any old job at a moments notice. It is very difficult to get the unemployment level below 4 percent because of those factors.

    Average wages increased about 1.2 percent in 2016 in line with the rate of inflation also at 1.2 percent. When I was working, the typical wage increases matched the rate of inflation unless some other factors resulted in a merit increase or bonus. However, for some demographics I can appreciate that wages increased by 3 percent or so in 2016 while for others the raises were near zero. The fact that inflation rates have been low means that wage increases are also low.

    Also factor in the retiring baby boomer generation being replaced by younger lower paid people.

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    Hi Schmidt,

    If U3 is consistently under-counting the unemployed then that rate should be higher and the U3 rate and above rates are also under-counting.

    One possible explanation is that the economy has changed and we now have a large quantity of temp workers who bounce job to job or project to project, taking months off at a time voluntarily. If that were true, the U3 rates are not necessarily under-counting based on the BLS parameters, but the U3 rate would still not be an accurate reflection of labor tightness.

    Also, the age 65 and older crowd is one of the only age-cohorts whose labor-participation rate never dipped after the recession and has increased.

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    Carlitos -- Yes I agree with you about the possible trends. With the advent of ObamaCare, many employees are no longer tied to a single company but can move around from job to job without the risk of losing their health insurance. That plus 401Ks for retirement savings encourage mobility of the work force instead of rigidity.

    On your other point on continuing to work beyond full retirement age (66 for me) the monetary incentive is certainly there for those who would like to work longer. Retiring at age 66, one will get 100 percent of their benefits paid monthly until they die. If they delay retirement to age 70, they get 132 percent of full benefits paid monthly until they die. The Great Recession put many people behind on the retirement goals, but by working to age 70 instead of 66 or 67, they can catch up so to speak.

    Here's the chart that shows it.

    I still look at my newspaper and see all kinds of ads for employment. The jobs go unfilled largely because the people wanting the jobs do not meet the qualifications or have health issues.