One of the bigger questions facing the FOMC and markets is how much slack remains in labor markets, especially with the unemployment rate at 4.3% in May 2017, the lowest level in 16 years, according to analysts at Nomura.
Key Quotes
“However the unemployment rate for a large majority of education and age groups was significantly higher in May 2017 than in May 2001, suggesting that slack in the labor market is higher than history would suggest.
- For 20 age and education groups, 15 have higher unemployment rates in May 2017 than 16 years ago. In fact, 6 of those have unemployment rates that are higher by more than 1.0pp.”
“Using the broader definition of unemployment to include marginally attached workers and those working part-time for economic reasons (often referred to as the “underemployment rate”, or U6), similar results hold: 19 out of 20 educationage groups have higher U6 rates in May 2017 than in May 2001, and 17 out of 20 have rates over 1.2pp higher.”
“How can labor market slack as measured by unemployment appear to be so much larger now compared to May 2001, when the overall unemployment rate was the same? In a word: weighting. Since 2001, the US workforce has shifted towards groups that have persistently lower unemployment rates – older and more educated – and away from groups that have higher unemployment rates – younger and less educated.”
“This weighting issue biases the unemployment rate by 0.4pp compared to May 2001, meaning that a 4.3% unemployment rate today is more consistent with a 4.7% unemployment rate in 2001. For U6, the bias is 0.8pp, meaning the 8.4% rate recently reported is more comparable to a 9.2% rate in 2001.”
“This result should not be surprising as it mimics the logic behind the downward trend in the labor force participation rate that occurs from an aging population.”
“Overall, we think that the time-inconsistency of unemployment rates is just one of many reasons why wage growth has not picked up more quickly, and also perhaps why inflation has not shown greater upward momentum. Looking forward, if unemployment rates continue to fall as many forecast, more and more comparisons will be made to the labor markets in the late 1990s and early 2000s, and when making those comparisons, caution needs to be exercised.”
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