Sunday, August 6, 2017

When 4.3% Is below Full Employment

CNN reported that the U.S. economy added “a strong 209,000 jobs” in July of 2017, with the unemployment rate falling to 4.3% to match a 16-year low. Unemployment had peaked at 10% in 2010, after the financial crisis of 2008. CNN cited many economists as saying that the 4.3% rate was “at or near” full employment, meaning that the rate would not go down to a significant degree.[1] Yet even within CNN’s own reporting, we can find reason to doubt this claim.
The first indication is the mention of wage growth being sluggish. “Wages grew only 2.5% in July compared with a year earlier.”[2] Chris Gaffney, president of Everbank World Markets, noted at the time that questions remained about when a spike in wages would be seen. Were full employment at hand, shortages in the supply of labor would have been pushing the wages up appreciably.
The explanation lies in CNN’s reporting of a statement by Steve Rick, chief economist at CUNA Mutual, an insurance company. “There’s still lots of people coming back into the labor market, looking for jobs.”[3] With a significant number of people deciding to resume looking for jobs, the official unemployment rate of 4.3% understated the actual unemployment numbers, which includes people no longer filing for unemployment compensation or even simply applying for jobs. In other words, the actual unemployment rate was significantly higher, so even if 4.3% would have corresponded to full employment, the U.S. was not at full employment. Hence, wages were not spiking.
A problem with CNN erroneously reporting full employment involves the resultant impression by the American people and the elected representatives that nothing further in terms of public policy was needed to get the structurally unemployed back to work. Put another way, relying on the official unemployment rate risks settling for economies that have written off the long-term unemployed.

[1] Patrick Gillespie, “Milestone for Trump: 1 Million New Jobs in Six Months,” CNN, August 4, 2017.
[2] Ibid.
[3] Ibid.