How Much Slack Is There In the Job Market?

The amount of slack in the labor market will be a key driver of monetary policy in the months ahead. Fed officials differ in their perceptions of job market slack, leading some to want to tighten policy sooner rather than later. Labor market data can present somewhat different pictures, but on balance, there is still a large amount of slack remaining.

Weekly claims for unemployment insurance have been trending at very low levels, consistent with a limited pace of job destruction. Short-term unemployment is now at a “normal” level, consistent with the usual labor market frictions of a fully recovered job market. However, long-term unemployment and measures of underemployment remain elevated.

Labor force participation is the lowest since the 1970s. About a third of the decline since the recession began is due to demographics, the aging of the population. However, most of the decline is due to individuals who have given up looking for a job. However, as we learned in the strong job market of the late 1990s, the labor force is a lot more flexible than you might think. Rising wages could easily lure recent retirees and stay-at-home spouses back into the labor force.

Surveys of hiring intentions have shown gradual improvement in recent years, but remain below normal. Job turnover data reflect an uptrend in hiring, but not a strong one. Geopolitical tensions could lead to business caution in the remainder of the year, restraining growth in capital investment and the pace of hiring. The percentage of workers quitting to find new jobs has picked up over the last year, but remains below normal.

Despite a modest uptick in 2Q14 (which followed weather-related weakness in 1Q14), labor compensation has been trending at a lackluster pace, consistent with a high level of slack in the job market. Fed Chair Janet Yellen has indicated a willingness to accept some pick up in average wage income before having to tighten monetary policy.

In short, while the job market has improved significantly this year, it still has a long way to go for a full recovery. Fed policymakers should be willing to let the job market run.

© Raymond James

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