Full Employment: What Happens Now?
In April 2017, the nation’s unemployment rate dropped to 4.4%, matching a 10-year low last seen in May 2007. To put this in perspective, the last time the unemployment rate fell below 4.4% was in May 2001, the end of the dot-com boom, when the U.S. economy grew by more than 4% annually for four straight years and the federal government ran a budget surplus.1–3
Just as noteworthy, another measure called the underemployment rate — which includes “discouraged workers” who have given up looking for a job and those who are working part-time but would prefer to work full-time — fell to 8.6%, the lowest level since the beginning of the recession in December 2007. At its height in 2009–2010, this rate stood at 17.1%.4
These rates may drop further but not by much. Zero percent unemployment is impossible — there will always be job churn — and the lowest rate during the past 60 years was 3.4% in the late 1960s. The underemployment rate has more room for improvement, but with 5.7 million job openings, it seems clear that we are near “full employment” — when everyone who wants a job can find one.5 So why isn't the economy growing faster?
Jobs vs. Good Jobs
U.S. employers have added 16.3 million jobs since February 2010, an average of almost 200,000 jobs per month. Economists believe that the United States requires about 145,000 new jobs per month just to keep up with labor force growth. Still, the job expansion has been solid and steady, with gains for 79 consecutive months.6–7
Unfortunately, many new jobs have been in low-paying, low-skilled occupations. For example, almost 3 million jobs were added in the leisure and hospitality industry, with another 1.5 million in retail sales.8 New jobs that do pay well require a college degree and/or specialized skills. A 2016 study found that more than 70% of new post-recession jobs went to workers with a bachelor's degree or higher, and most of the rest went to those with some college education.9
This shift in the labor market has left many less-educated workers out of the recovery and resulted in persistent pockets of high unemployment in regions that have depended on manufacturing and other blue-collar occupations.10 Despite efforts to bring manufacturing back to the United States, many of these jobs are lost forever due to automation and the simple fact that American workers cannot work for the same low wages paid to foreign workers.
Though a more highly skilled workforce is needed, college alone is not the answer. By 2020, there will be an estimated 1 million more computing jobs than qualified workers to fill them as a result of the small number of computer science graduates — a gap that might be filled by targeted training programs.11
Wage stagnation has been a persistent issue, but this may be changing as the labor market tightens and employers compete for workers. In 2016, the average hourly wage rose by 2.9%, the highest gain since the recovery began. Although still low, it is made stronger by low inflation, which was just 1.7% for the year. The best news is that these gains are filtering down to lower-wage workers; the leisure and hospitality industry saw wages rise by 4.4%.12
Early in the year, economists predicted 3.5% wage growth in 2017, but the rate was lower through April.13–14 With inflation beginning to rise, the big question is whether further tightening of the labor market will push wages up quickly enough to outpace inflation.
The Productivity Problem
Despite job gains, the U.S. economy has been mired in slow growth mode for a decade. Real gross domestic product (GDP) rose by just 1.6% in 2016 and ran at a 1.2% annual rate during the first quarter of 2017. The last time GDP growth exceeded 3% for a full year was in 2005.15
There are many reasons for slow growth, including economic weakness overseas, lagging consumer spending (due in part to low wages), high health-care costs, and the reluctance of U.S. corporations to invest their profits. Some factors are already shifting in a positive direction, but there is one fundamental drag on the economy that will only worsen: the aging of the U.S. workforce and the resulting loss in productivity.
The labor force participation rate — the percentage of the civilian labor force age 16 and older who are working or actively looking for work — peaked at 67.3% in early 2000, not coincidentally the last time GDP grew by more than 4%. The participation rate has dropped steadily since then; in April 2017, it was 62.9%. This reflects lower birth rates, increased college enrollment, and men in their prime working years dropping out of the labor force. But more so, it is a result of the huge baby boomer generation who are reaching retirement age. Baby boomers are working longer than previous generations, but this can't offset the demographic shift.16–17
Put simply, a nation's potential GDP is a product of the number of workers times the productivity (output) per worker. With the U.S. workforce shrinking in relation to the total population, a large increase in worker productivity would be required to push the economy to a sustainable annual growth rate of 3% or more. In the long term, the shrinking labor force — even at full employment — may hold back the U.S. economy.18