“Full employment” is hard to quantify

What is full employment and how will we know when we have it? That question arose in response to Tuesday’s news that the number of Minnesotans with jobs had increased and that the unemployment rate had decreased.

That is good news for the households affected and for our society as a whole. After a prolonged period in which unemployment rates were higher and job growth lower than what we are accustomed to, we can be grateful for a strongly positive report.

It does, however, raise the question familiar to parents on long road trips: “Are we there yet?” Is our state economy back to “good times” or “full employment”? Or, do we need additional strong increases in job numbers and decreases in unemployment rates before we know Minnesota has returned to prosperity?

The usual economist’s answer, “It depends,” is correct but understandably frustrating. Still, there is no simple or unchanging answer to the question of what constitutes full employment. The issues are more complex than meets the eye, and measuring levels of employment and unemployment are more challenging than people realize.

These issues can take hours in an economics class, but there are some simple points to remember.

There always are some people who are “unemployed.” One basic tool for measuring employment is a monthly survey of about 60,000 households nationwide. The surveyor asks a set of precise questions about which members of the household, age 16 or over, have worked for pay or are self-employed during a specific week. Another question asks if anyone who was not employed took specific measures to seek a job.

If the answer to the first question is yes, the person is both “in the labor force” and “employed.” If the answer to the first is no but the second is yes, then the person is “in the labor force” and “unemployed.” If the answer to both is no, then the person is “out of the labor force.”

In a dynamic economy, there always are some people who are not employed but are looking for work. They may have been laid off from one job but will get another one soon. Or, they may have just completed some program of education. Even if their job search is quickly successful, they will be counted as “unemployed” if they are not working during the survey week.

Inevitably, some individuals’ jobs disappear because of long-term technological change. Buggy-whip makers were the classic example after automobiles became common. These people typically are older than 50 and have a hard time acquiring the skills for a new job after decades in an obsolete one.

These two types of unemployment occur even when an economy is prosperous. No hard-and-fast rule exists about exactly what level of unemployment they “should” cause, but many think that they alone account for unemployment rates of 2 percent to 4 percent.

The number of jobs has to grow as the population and labor force grow. In May 1998, Minnesota’s unemployment rate dipped to 2 percent. Some 2.68 million people had jobs. This week’s report for October showed an unemployment rate of 3.8 percent, nearly twice as high, but the number of jobs was 2.86 million, some 180,000 higher than when the unemployment rate bottomed out.

The explanation is that the population and the number of people who wanted jobs continued to grow from 1998 to 2004. The labor force grew from 2.73 million to 2.97 million over the same interval. The labor force grew by 237,000, more than the number of jobs, so the unemployment rate rose.

Extremely low unemployment rates are not sustainable. The low unemployment rates we saw from 1997 through 1999 were wonderful for job seekers but bad for employers.

These resulted from a booming national economy in which Minnesota played a key role. But the pace of that boom depended in part on an unsustainable bubble in high-tech firms and stock markets that simply had to collapse sooner or later. It did in 2000-2001. Minnesota’s unemployment rates rose sharply and the absolute number of jobs shrank slightly.

Long-run averages are not a perfect indicator of “full employment” but they are a useful reference. Changes in the structure of an economy and in labor market practices can alter what constitutes “full employment.”

But if we look at long-run averages, it does give some idea of where we stand. The unemployment rate for Minnesota for the last 25 years is 4.8 percent and for the last decade, 3.7 percent. In the last decade, the rate has been less than 2.6 percent in only one month out of 10. If we are not at “full employment” by historic standards, we are getting close to it.

© 2004 Edward Lotterman
Chanarambie Consulting, Inc.