STACEY VANEK SMITH, HOST:
Hey, everyone. It's Stacey and Cardiff. And this is THE INDICATOR FROM PLANET MONEY. Today on the show, are we there yet? And by there, we mean, is the U.S. economy at full employment yet or can the labor market get even stronger than it already is? Now, this seems kind of obvious, but it is actually a much trickier question than you might think because the definition of full employment is kind of unclear.
CARDIFF GARCIA, HOST:
Yeah, that's right. The Federal Reserve, for example, says that the U.S. economy is at maximum employment - that's another phrase for full employment - when all Americans that want to work are gainfully employed. But another definition that economists sometimes use is whether all workers are employed in jobs that make the best use of their skills. So the quality of the jobs matters too and not just whether there are enough jobs.
VANEK SMITH: And finally, a lot of economists say the labor market is at full employment only when it can't get any better without inflation taking off. The idea is that if enough workers have jobs, then companies have to pay higher salaries to attract new workers. And the companies then offset the cost of paying those higher salaries by raising the prices of what they sell. Prices going up - that is inflation.
GARCIA: So you've got these different definitions. And plus, it's hard to measure just how strong the labor market is in real time in the first place. So the best we can do is to look at a bunch of economic indicators to get an overall picture and then make an educated guess as to whether the economy is at full employment.
VANEK SMITH: So historically, to get an idea of what full employment is, people would look at the unemployment rate. So right now, the unemployment rate is super-low, just 3.5%. That is the lowest in more than 50 years. So does that mean we're at full employment?
GARCIA: Well, to help us answer that question, we are going to be joined today by an old pal of the show, economist Jared Bernstein. He has brought three indicators for us that he thinks offer better signals as to whether the economy is at full employment. That is coming up right after the break.
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GARCIA: Jared Bernstein, Welcome back to the podcast.
JARED BERNSTEIN: Thanks so much for inviting me.
GARCIA: So, Jared, before anything, cards on the table here - you do not think the economy is at full employment - right? - despite the unemployment rate being so low.
BERNSTEIN: Correct. I don't think we're at full employment yet. We're closing in on it, but we're not there.
VANEK SMITH: That seems crazy to me because when I was growing up, I feel like there was always - the unemployment rate was always 5%. So when 5% of the population was unemployed, then that meant it was at full employment because, you know, 5% of people, like, some of them don't want jobs or are doing other stuff. And now we're at 3.5% unemployment, and you still think like, no, we could push it further.
BERNSTEIN: Well, first of all, I applaud the fact that when you were growing up, you knew what the unemployment rate was. So that...
VANEK SMITH: I was a very sophisticated child.
BERNSTEIN: And makes sense that you landed where you did.
VANEK SMITH: (Laughter) Actually, that's probably true.
BERNSTEIN: I think the challenge with the unemployment rate is that for decade upon decade, economists thought we knew the lowest unemployment rate consistent with stable inflation. And we thought that number was six, and then we thought it was five, and then we thought it was four. And now, if we're being honest, we have to recognize that we don't really know what that number is. So we have to turn to other indicators to evaluate whether we're truly at full employment or not.
VANEK SMITH: OK. OK. I'm definitely willing to hear you out, Jared. You always have very interesting smart points to make. So you have three indicators about whether or not we are at full employment. What is your first indicator?
BERNSTEIN: My first indicator is inflation. And the inflation gauge that the Federal Reserve watches most closely was recently seen growing at 1.8% year over year. Now, listeners to our show probably know that the Fed targets a 2% inflation rate. So if inflation is below 2%, that would argue that we're not quite at full employment, generating the sort of pressures that Cardiff mentioned earlier.
And it's not just last month that we had this. In fact, inflation has been below its target for about 10 years. So I would say the most common reason economists would argue that we're not quite at full employment yet is this persistently below target inflation rate.
VANEK SMITH: But that - but 1.8% is barely below 2 percent. Or am I looking at this wrong? Because it seems like we're basically at 2%.
BERNSTEIN: Well, that's why I cited this long-term result. Sure, if you spend a month below 2%, that doesn't tell you anything. If you spend 10 years below the 2% target, that tells you a lot.
GARCIA: OK. So that's indicator No. 1- inflation. Jared what is indicator, No. 2?
BERNSTEIN: Well, indicator No. 2 is a pretty intuitive one, and that's a wage growth. Now, wages have grown more quickly as the unemployment rate comes down. And that makes a ton of sense because workers have a bit more bargaining power in tight labor markets. I mean, anytime you can tell your employer no thanks or take this job and shove it or some variation between those two poles of...
VANEK SMITH: That's a good day.
BERNSTEIN: That's a day when you expect to see some wage pressure because of very low unemployment. Employers have to bid up their wage increases to get and keep the workers they need. But with unemployment rate at a 50-year low, you might expect to see more wage pressure than we're seeing. One frequently cited series was last seen growing at 3.2% year over year. Now, that's better than the 2% kind of growth we saw a while ago.
And, by the way - and this relates to my indicator one, slow inflation - wages are growing a little bit north of 3% - with inflation, below 2%. That means real wage gains. So that's a very good thing for working people. But wages should be growing a little bit faster if we're truly at full employment and they're not.
GARCIA: Yeah. And, Jared, there is historical evidence that wages can grow faster than they're growing now, right? I mean, wages were growing faster than the current pace back in the '90s.
BERNSTEIN: Yes, they were. But there's a very important asterisk here, and that's that back in the '90s, productivity growth was faster. And when productivity is growing faster, employers can dole out wage increases while maintaining their profit margins. So kind of what you're seeing here is really a sort of struggle between worker power and employer power trying to claw back for the workers a bit more share of the growth.
VANEK SMITH: So, Jared, your first two indicators that maybe we're not at full employment are that prices aren't growing as fast as they could be, wages aren't growing as fast as they could be. What is your indicator No. 3?
BERNSTEIN: Indicator No. 3 is less well-known than the first two, but it's labor share of national income. So national income is all the compensation, all the money in people's paychecks, plus all the profits that companies make.
And so - and there's some other cats and dogs in there. But basically it's the income that the economy generates. And you want to ask yourself, what share of that income is going to workers? That's the labor share of national income. And historically, at economic peaks, that share has stood at 66%.
Now, even though it's been increasing of late - which is a good sign and related to the tightening job market - it's at 63%. So that difference between 63% and 66% - three big percentage points of national income - that, to me, also signifies that we're not quite at full employment yet.
VANEK SMITH: Well, let me ask you this question. So we're at 3.5% unemployment right now. Where do you think we need to get for full employment to happen? Like, where would you be happy?
BERNSTEIN: Well, in a way, it's a little bit of a trick question because...
BERNSTEIN: ...I've just offered...
GARCIA: Our favorite kind.
VANEK SMITH: Never.
BERNSTEIN: I've just offered you three different indicators that I think allow you to kind of triangulate full employment better than the unemployment rate. But I've heard people now talking about three and even numbers below that. And so I'd be more than interested to see what happens to my three indicators if the unemployment rate got down to levels that are even lower than it is today.
But there's a hugely important caveat here. All of those indicators - inflation, wage growth and labor share - have been down for so long that they need to grow faster than average for a while to make up lost ground. And that means we don't just need to get to full employment, we need to get there and stay there for a while for workers to really feel the benefits.
GARCIA: Jared Bernstein, always a pleasure, man.
BERNSTEIN: My pleasure.
VANEK SMITH: Thank you, Jared.
This episode of THE INDICATOR was produced by Darius Rafieyan. Our intern is Nadia Lewis. Our editor is Paddy Hirsch. And THE INDICATOR is a production of NPR.
GARCIA: Hey, by the way, everybody - THE INDICATOR is looking for an intern. So if you're a recent college graduate and you might be interested, go to npr.org/money, and you can apply there.
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