Tomorrow, the Bureau of Labor Statistics will release September’s numbers on the state of the labor market. As usual, I’ll be paying close attention to the prime-age employment-to-population ratio (EPOP) and nominal wages, which are two of the best indicators of labor market health. There will likely be discussion of whether or how September’s storms affected the data, and I lay out some those issues below. Last, Friday’s report will give us a chance to examine the “teacher gap”—the gap between local public education employment and what is needed to keep up with growth in the student population.
Falling unemployment
The unemployment rate has fallen steadily over the last seven years, and many have said that the current rate of 4.4 percent means we are back (or at least very close) to full employment—meaning that pushing unemployment any lower would cause inflation to accelerate above the Federal Reserve’s preferred 2 percent target. That is why some observers are calling upon the Fed to continue to raise rates, even though low unemployment has not translated into consistently strong nominal wage growth for workers across the economy.
The unemployment rate is only one indicator of labor market health—and other indicators, like the prime-age employment-to-population ratio (EPOP), suggest an economy with a fair amount of slack. When the economy first hit its current 4.4 percent unemployment rate in April 2017, I noted that, historically, an unemployment rate of 4.4 percent was associated with higher participation and employment in the labor market. In fact, based on the relationship between unemployment rates and prime-age EPOPs in the last two business cycles, the current prime-age EPOP of 78.4 should be 2.3 percentage points higher (80.7 percent). Unfortunately, its current rate is still below its lowest level in the last full business cycle. Nominal wage growth is another key indicator of labor market health. Year-over-year nominal wage growth has remained at 2.5 percent for the last several months, below target levels and where it would be expected in a stronger economy.
All told, the Fed was correct to resist further rate increases in their September meeting. Reaching genuine full employment should be the main concern of the Fed so that workers—white and black, young and old—see the benefits of tight labor markets in their job prospects and wages.
