The U.S. Is Not at Full Employment—Don’t Believe the Trump Administration’s Hype to the Contrary

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By Marshall Auerback, a market analyst and commentator. Originally published by the

There is a general consensus that the U.S. economy is close to full employment, given that one of the most commonly used measures (based on ) indicates an unemployment rate that has fallen to 3.9 percent.

As good as that figure appears to be, it is troubling that wage growth for the majority of Americans remains tepid, hardly what an observer would expect if the labor markets were as tight as implied by that number. And in fact, if one digs into the data a bit more closely, it does bring to mind the old expression commonly attributed to Mark Twain about “lies, damned lies, and statistics.”

The problem with these employment statistics (or “damned lies,” depending on one’s perspective) is that they could well be overstating the current strength of the U.S. economy, which is problematic given that U.S. consumers are already seeing their discretionary income squeezed by interest rate hikes (higher credit card servicing, more expensive mortgages) and higher energy prices.

Additionally, while many economists champion our “flexible, gig economy,” the reality is that for many workers this “flexibility” represents in fact “casualized” labor, that is to say, involuntary part-time work, which is unaccompanied by benefits such as health care. This puts more strains on the economy and exacerbates worker insecurity (hardly propitious in terms of encouraging consumer confidence). And the economy as a whole is still characterized by a large stock of private debt, much of which hasn’t been resolved or restructured (as was the case, for example, during the Great Depression). Therefore, if policymakers continue to lean into this tepid recovery via more interest rate hikes and/or tighter fiscal policy, they could well tip us back into recession (or something worse).

A longstanding problem relating to our economic measurements such as employment is that U.S. policymakers see much of the employment data at the same time that the public does, and they are forced to make decisions based on these estimates. The bottom line is that what most people want to get out of unemployment data is not only what the current number is and if it’s getting better or worse recently, but also what it means for policy. Will interest rates continue to be raised? Will there be more cuts in government spending? As far as the policy response to the current employment situation, policy is largely based on the less comprehensive measures calculated (based on volatile monthly employment data), reported (sent out to the public and policymakers alike at the same time, even though it’s often subject to significant revision later)—meaning that, in spite of the bests efforts of the people working at the Bureau of Labor Statistics (BLS), our monetary and fiscal officials are a bit like the proverbial pilot flying without a full complement of engines or navigational equipment.

To dig into the weeds a bit further, the payroll and household surveys are two different samples designed to track the more comprehensive Business Enterprise Dynamics (BED), but which are published earlier than the BED.

The payroll is structured around a sample of companies, and the household around a telephone sample of households where employees live. The payroll survey covers a much larger number, but, once set up, suffers from the weakness that it reflects company failures that drop out of the sample, while only guessing at new companies starting up (the so-called tries to cope with this).

The household model is small and very variable month to month (there is no penalty for not answering). Basically, policymakers must use a compendium of measures to get the best picture of what is happening. But the third and most comprehensive measure, the BED, takes several months to compile accurately, which means that policymakers are seldom getting a full picture, which is particularly important if and when the economy hits an important inflection point.

Based on recent publication of the BED data (which currently is only compiled to the third quarter of 2017), there are hints that employment is not as robust as the payroll and household survey measures have hitherto suggested. This disparity might also help to explain why wage growth remains so tepid, in spite of the repeated characterization that we are close to full employment.

And the worst thing from a political standpoint is that the Trump administration has essentially discredited the use of additional fiscal policy by directing so much of his tax cuts to wealthy individuals and corporations, who are more likely to save the money than to reinvest it in the economy, rather than direct them to middle and working classes, who need it most and would do the economy best if they had those resources because they would be more likely to spend the tax dollars. Higher consumption would (as economists like to say) increase the multiplier effect on the economy as a whole. Most worrisome is that because of the Trump policy error, he may well have politically discredited the use of fiscal policy as a lever to combat recession. One can easily imagine that the next time anybody suggests more fiscal stimulus, the deficit scolds are almost certain to argue that this was tried before (by Trump) and proved wanting, and besides, “we can’t afford it,” which is nonsensical.

And of course, the other point to bear in mind is that some 10 years after the great financial crisis of 2008, we still have lower employment participation rates, which is to say we have fewer people who are either employed or are actively looking for work in the economy as a whole (in part because they have become discouraged about their employment prospects), and a higher “casualization” of labor (i.e., the so-called “involuntary part-time” group, who generally work without the security of a long-term contract, and corresponding benefits such as health care). A recent study by the San Francisco Federal Reserve (written before the April employment data became available, but still relevant) that:

“[I]nvoluntary part-time work was running nearly a percentage point higher than its level the last time the unemployment rate was 4.1%, in August 2000. This represents about 1.4 million additional individuals who are stuck in part-time jobs. These numbers imply that the level of IPT work is about 40% higherthan would normally be expected at this point in the economic expansion.”

This goes a long way toward explaining why wage pressures remain strikingly subdued, indeed, the most convincing empirical evidence suggesting that the labor market in the U.S. is not nearly as robust as the payroll figures imply.

So the BED report may have much broader ramifications for us, especially as the Federal Reserve continues to raise interest rates and calls mount from congressional deficit hawks, such as House Speaker Paul Ryan, to adopt a “more responsible” fiscal posture (for “fiscally responsible,” read: “austerity”). These warnings are based on the same view that the economy is rapidly growing to full capacity and is likely to encounter inflationary bottlenecks.

But this certainly isn’t being borne out by wage growth, which, even though increasing at 2.3 percent year over year, continues to be relatively subdued by historic standards. By way of contrast, the last time the economy experienced an unemployment rate around 4 percent, wages were growing in the range of 3.5-4.0 percent. The SF Fed report that were all the part-timers able to obtain gainful full-time employment, which they estimate to be around 1.4 million people, wage pressures would be significantly higher. But the authors go on to suggest that this involuntary part-time employment is here to stay, which would imply the need for a less hawkish monetary and fiscal policy stance, given that these part-timers in effect create an “army of partially employed,” which can be used by employers to deter aggressive demands for higher wages (using the threat of turning a full-time worker to a part-time “consultant” as a disincentive to strike for better pay).

Buttressing the SF Fed study is a research report done by ’s Philippa Dunne (“May 3, 2018, Participation rates, wages, and market power”; ) where the author makes clear that “a 1-point rise in the participation rate adds about 0.4 point to the growth in average hourly earnings (AHE).” This is a technical way of measuring how much higher wage growth would be if those with part-time jobs were able to secure full-time employment.

History shows that on its own, the nonfarm payroll report is a lousy statistic. Given the size of today’s labor force, the revisions to the originally reported number, which comes as more information becomes available to the BLS, can be in the hundreds of thousands. This is because the figures are based on extrapolations from a relatively small series, and they therefore tend to miss key inflection points, where the economy might suddenly stall if a major financial shock is encountered (such as was the case in 2008). Therefore, no matter what the underlying economic reality is, policymakers and the markets can get a payroll number in any month or even set of months that is very misleading. We experienced this phenomenon in the summer of 2008, when the payroll and household data was not yet recording the significant deterioration already being experienced in the economy (and which only became apparent when the BED revisions came in almost a year later). As Professor Bill Mitchell :

“What is apparent is that there is still no coherent positive and reinforcing trend in employment growth in the US labour market since the recovery began back in 2009. There are still many months where employment growth, while positive, remains relatively weak when compared to the average labour force growth prior to the crisis or is negative.”

Which also explains why wage growth has been so tepid. As economist Paul Krugman has “if you want to boost overall spending, you don’t have to give huge tax breaks to corporations. You could do lots of other things instead—say, spend money on fixing America’s crumbling infrastructure, an issue on which Trump keeps promising a plan but never delivers.” In other words, Trump’s tax bill did not give the economy maximum bang for the buck. So if and when it becomes evident that the economy isn’t as strong as people think, the argument will be that we can’t do additional government spending or tax cuts, as that was tried under Trump without success. Parenthetically, that may have been the plan all along from some of the more Machiavellian members of the GOP, but hardly excuses the Democrats for their incessant focus on the deficit (see , and ) rather than offering alternative fiscal policies that would generate more robust employment and income growth.

The bottom line is that U.S. economic growth is likely to be more problematic as we move forward. Labor casualization appears to be more firmly entrenched as part of our economic structure, which means moderate and heightened economic insecurity amongst the middle and working classes. A former car-worker now packing boxes at FedEx may still be “employed,” but this is hardly the same quality job he held 20 years ago. The employment data doesn’t capture this.

On top of that, energy costs are up, and floating rate mortgage payments have risen. Health care remains prohibitively expensive as the underlying problem of monopsony in the health insurance and pharmaceutical industries has not yet been tackled. We are still far from the point where anybody in power (especially the Federal Reserve) needs to concern itself yet with an economy bristling with inflationary pressures because that’s an economic reality we’re still far from. Quite the contrary: The real economy can’t handle higher rates; all those people with credit card balances are already feeling the squeeze of higher rates in their minimum monthly payments. And all the corporate debt that has to be refinanced at higher rates over the next 24 months will have the same effect on the corporate world. The stock market can’t handle higher rates either, and when that begins to fall again, this will have a powerful signaling effect, which will further rein in discretionary spending. And to top it all off, there has been no evidence of a wage breakout. So we therefore have the makings of a significant policy error ahead.

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24 comments

  1. Expat

    Real wages are not increasing so there is obviously something wrong with the model or the numbers. In any case, it is fun to see Trump touting these numbers as proof of his success when he derided these stats during his campaign, claiming that real unemployment was three or four times the official figure.

    It’s all a rather thin, fragile bubble. Corporations and consumers (who remembers when they were citizens or just plain people?) would roll over and die with higher rates. A healthy, real economy with 4% unemployment would easily support interest rates at realistic levels like 7 or 8%.

    Reply
    1. kevin

      I don’t think you can jump on the numbers being wrong. They just don’t represent what people think the represent. As Yves and the SF Fed point out, you should be using the U6 not the U3. That immediately paints a better sense of the economy.

      Additionally, and Yves didn’t mention this, there is a growing body of research that large monopsonies are holding down wages. Because of this it is critical that one specifies exactly what they mean when they say “slack”. Is slack the amount of available labor at the prevailing wage or at the market wage? People have decided to withhold their labor at these measly wages. That is, they are not available to work, which is not “slack”. If they aren’t slack, BLS numbers properly represent the economy. If we returned to the market rate then, yes, plenty more people would enter the workforce and the participation rate would increase. While these people would work under a different set of conditions and be considered slack, I wouldn’t call it slack, because this is an alternate economy.

      Reply
      1. SJB

        Kevin, can you provide some of these references, or even some general info on them? I would like to look at them. Thanks!

        Reply
  2. David Carl Grimes

    According to the BED, we’ve already started to lose jobs in September 2017. Last time this happened was in March 2010. I’m wondering if a recession is already well underway.

    Reply
  3. jackiebass

    We have a real problem caused by student debt. These are the people that used to enter the work force at a reasonable wage. They had disposable income to spend on housing and consumer goods. This large group of people, because of student loan debt, are struggling and don’t have disposable income. This limits how much the economy can grow. As long as we have an economic system that burdens people with enormous debt from getting an education required to succeed in our economy, our economy will continue to struggle and not grow. I’m 76 years old. i grew up at a time when a person had many choices to succeed. They could go to work in manufacturing at a good wage. They also could get a cheap education to prepare them for other work. I chose to go to college. I went to a PA state school. At that time tuition was $75 a semester and books and supplies cost another $25. I stayed at home so I didn’t have to pay for living expanses. Fortunately my parents paid for this. I was the first person in my family to get a college degree. Back then the American dream was a reality.

    Reply
    1. JTMcPhee

      Maybe the people shouldering those obscene “student loans” (there has to be a better name for them — “Bankster millstones around their necks, enforced by federal functionaries”?) should all

      #juststoppaying?

      They are already being crushed by The System, and so far at least most of them don’t face being locked down in an actual brick-and-mortar debtor’s prison…

      Reply
  4. Jim Haygood

    these employment statistics … could well be overstating the current strength of the U.S. economy.

    They could … but other corroborating evidence suggests that despite its flaws and exclusions, the household survey is in sync with a late-cycle economy.

    In a stylized business cycle, bond prices peak first, followed by stocks, with commodities putting on a final fireworks show as the economy enters recession.

    Applying the model to this cycle, bond prices reached their highs in July 2016. To date, the S&P 500’s highest level was on Jan 26, 2018. Now commodities are on a roll, with the CRB index hitting a fresh 3-year high yesterday as oil prices barrel skyward. Chart:

    Pretty much a classical cycle, in other words. When commodities begin their ascent, the economy typically has a year or two left before rolling over. In that context, the Federal Reserve’s bond dumping program will advance the date of our plunge off the cliff. It’s pure economic witch doctory.

    Reply
  5. jerry

    Even if we were at full employment, which we’re not, what difference does it make? Most people cannot afford insurance, rent, or even a vacation from their slave-wage job, nevermind a down-payment on a house or new car.

    It’s important to keep in mind that inflation is always relative, in this case the growth in wages compared with just about everything besides televisions (gotta keep the masses subdued). So, in one sense, yes wages need to be higher. But it is just as important if not more so to examine the sinister causes behind skyrocketing costs of things like health insurance, rent, or education.

    I happen to live in a more liberal state and we do at least see decent minimum wage increases coming about. What will happen when the cost of labor increases to the point where businesses (especially smaller ones) cannot afford to employ people? The cost of giving them health insurance, renting a store, higher nominal wages, etc. will squeeze them out – which is why I call this era “The Great Squeeze”. Every possible dollar is just being squeezed out of people and businesses so there is the least possible cushion, leading to the precariat class we have now.

    Truly sad times. The largest corporations of course will survive and probably start just using robots. What will it take for those in power to regain some sense of humanity I wonder? I think we all know they aren’t going to do it on their own. Will we the people?

    Reply
  6. rd

    We are at full-employment of fully-trained, ready-to-go-out-of-the-box employees. I am still not seeing employers investing in training new staff.

    For example, I keep hearing about a truck driver shortage. Here is a question for the companies – would I as a potential employee or independent contractor want to pay a bunch of money and spend time to go to truck driving school to find a job in a field where the companies are actively looking to replace drivers with self-driving trucks in the next decade?

    At a certain point, companies are going to have to pay for training prospective employees instead of assuming they can just poach pre-trained employees from other firms. There is probably a labor pool that would be willing to work for reduced wages during a fully-paid training and apprenticeship program. They would probably view their employers with some loyalty as well. However, that requires companies to think of employees as non-disposable though which goes against the grain of most companies’ DNA these days (e.g. the lexicon shift form Personnel to Human Resources to Talent Management).

    Reply
  7. Jeremy Grimm

    “History shows that on its own, the nonfarm payroll report is a lousy statistic.” And I believe the same may be said of so many of the other government measures of our economy. Enron too, looked good on paper … for a while.

    Reply
  8. Jonathan Pine

    The problem is the way prospective employees are hired. Instead of looking for adaptability and intelligence firms hire as if they are hiring contractors for specific job requirements, as if the job requirements will never change. Perhaps we are moving into a time when the tenure for a job is defined and the employee is automatically dismissed at the end of his tenure.

    Reply
    1. Wukchumni

      Odd that the 1% is so disproportionately @ odds on either end of the financial spectrum. I doubt many in the Tenderloin or on Skid Row will be going to Gstaad this year though.

      Reply
      1. JBird

        For far too many people, the increasing numbers of the homeless aren’t really people. The destitute wanders are at best collateral damage, and at worst lazy parasites, in this wondrous economy that enriches all the deserving people. So why count the undeserving?

        Reply
        1. sierra7

          JBird:
          Or, re your alluding to “…at best collateral damage, and worst lazy parasites,…” How about those that refuse to participate in a national political/economic criminal enterprise system that is definitely destroying the Commons?

          Reply
          1. JBird

            As I see it the choices are the following; one can dropout and effectively disappear or die; one can participate and get screwed, but hopefully get the necessities for living; a person can possibly waste one’s life by spending it, while engaging with and trying to reform/rebuild the current political economic regime, and quite probably failing; lastly, a person can be a quisling by having good prosperous career working for the current regime.

            Restated poorly as I’m using my cell to post. Sorry. Most people cannot dropout of the system especially if others depend on them. The choice is to participate in order to get food, clothing, and hopefully shelter, or don’t participate and don’t get them, and so the family with the dog compels your participation. Those who are fully engaged with the system and are truly trying to reform or even rebuild it are almost completely blocked; those who benefit the most from the current expanding neoliberal political economic Hellscape are doing the blocking.

            Reply
            1. jrs

              the thing is there aren’t that many quisling positions open even for those who want them (and anyway you won’t get them without a real fancy degree and the right pedigree). But there are some necessity of life jobs that the lower orders can sometimes get, but one can lose all access to those as well. So maybe most people are better off spending their life effort working toward revolution.

              Reply
  9. Thor's Hammer

    40% Unemployment Ain’t Awesome
    By David Stockman. Posted On Friday, May 4th, 2018

    “back in December 2000 (the last time U-3 hit 3.9%) what we consider to be the comprehensive unemployment rate was 34.6%. Today it stands at 40.0%.”

    Reply
    1. jrs

      whatever real employment is with tons of discouraged workers and half of the rest working low paid service jobs if they can get them and low paid gig jobs if they can’t, this economy doesn’t feel like a good economy, not even like we knew in the 90s or naughts. Nope not even that good. It feels horrible to live in, it seems nearly impossible to get a job that actually pays one’s bills, seems like most people over 50 if they lose a job get permanently discarded etc.

      Reply
  10. Altandmain

    Let’s face it, the powers that be don’t want full employment. Marx called it the reserve army of labour. Others, most notably Michal Kalecki have noted how unemployment is used to control and discipline employees through fear.

    The brutal reality is that there is massive underemployment. How many people have you seen who are working in low wage, unstable work that have the potential to contribute so much more to society?

    Likewise, as the other posts have discussed, discouraged searchers exist in huge numbers. They are often not acknowledged.

    It seems to me that once in office, politicians love to fudge the numbers in a bid to make themselves look good. Who do they think they are fooling?

    Reply
    1. animalogic

      You are quite right to observe the political preference for a reserve army of unemployed.
      With one exception this article fails to place economic issues within a political context.
      “for “fiscally responsible,” read: “austerity”). These warnings are based on the same view that the economy is rapidly growing to full capacity and is likely to encounter inflationary bottlenecks.”
      “Austerity” is not merely an economic policy. It’s also (primarily ?)an ideological policy. The unemployment rate, the rate of inflation & absence of increasing wages are not just the result of dubious (dishonest ?) statistical measures but are the outcome of political policies. For example: lack of wage increases is also the consequence of 40 odd years of attacks on unions – collective bargaining by a significant union movement (who haven’t yet sold out their members) will always tend to put upward pressure on wages.
      Ignoring asset inflation in setting economic policy is also a political decision.
      To many this all may seem obvious, however it is also worth remembering.

      Reply
  11. Newton Finn

    No matter how many people are able to eventually find work these days, the bottom line is that the government and business “leaders” of our country swapped, for the majority of its citizens, decent and secure jobs for crappy and precarious jobs. That, in a nutshell, is what happened over the past 40 years from the perspective of the average American wage earner. The only question is whether the majority of citizens will complacently adjust downward their quality of life, and that of their children and grandchildren, to this infuriating and depressing sell-out, or whether they will turn on their “leaders”–and perhaps the capitalist system itself–which turned vibrant and aspiring middle and working class people into discouraged and desperate wage-slaves. Don’t think for a moment that this thing called revolution can’t happen here. That’s what those other “leaders” thought in those other countries.

    Reply

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