Full Employment: Are We There Yet?


recent Pew Research Center poll showed that only about 19% of Americans trust their government. This is a historically low level for the measure, which shockingly at one point in the 1950s actually reached the 70% range. There are undoubtedly a myriad of reasons for this, which are beyond the scope of this post. However, as advisers we hear this distrust on an almost daily basis in conversations with our clients, and it has an important impact on how they view the economy and their investments. Let’s take the unemployment rate as a prime example. As the rate dips down into the 5% range for the first time since before 2008, it’s not surprising to hear objections such as: “Aren’t there whole swathes of the working population that lost jobs in the Great Recession, and that have become so discouraged that they have dropped out of the job hunt completely?” And while that is probably the most common perspective, we also hear from our business owner clients that the job market is exceptionally tight, with qualified candidates becoming harder to find and afford.

So what is the whole story around the unemployment situation? First of all, there is some truth to the claim that the official rate is “inaccurate,” since one can rightly point to the fact that the official unemployment rate  measures only those that are unemployed and “actively looking for work.” So clearly it doesn’t communicate the full scope of the issue.

Unemployment Rate: 2006-2016

Unemployment Rate chart -- 1996 to 2016

source: bls.gov

This weakness of the unemployment rate (called the U-3 by the BLS) isn’t something new. According to BLS spokesman Gary Steinberg, the U-3 has been calculated with the same methodology for decades. And that’s why other measures exist, such as the U-4, U-5, U-6, and the Labor Force Participation rate. So let’s take a look at a couple of these to get a more complete picture of the employment situation. Take the Labor Force Participation rate, which measures, of course, the percentage of the population that is actually participating in the labor force. This is where a lot of controversy lies, because as you can see from the chart below, the US labor market appears to be heading in the wrong direction when viewed from this angle.

So what is really going on here?

First of all, we need to consider the trends in the U.S. population as a whole. As a nation, we are collectively getting older. This can be seen most starkly in the massive workplace exodus of the Baby Boomer generation, which many demographers define as those born between 1946 and 1964. Running the math, these Americans are now between 52 and 70, and they are retiring in the millions every year. This obviously puts a huge downward pressure on the labor force participation rate, as can be seen in the following chart.

Since workers who retire are technically no longer participating in the labor force, the Baby Boomer exodus is having a dramatic effect on the labor force participation rate. So we have to look at a few other measures to get a complete picture on unemployment.

This next chart is helpful. It shows the percentage of the prime working-age population who are employed. As you can see, the ratio has not reached pre-Recession levels, but it is heading the right direction. This would support the case that jobs have been made consistently over the last 6 years, that the US economy is growing and healing from the worst Recession in living memory, albeit not very rapidly. We are still in the economic equivalent of 2nd or 3rd gear.

Perhaps one other data point to consider is the U-6 measure, also published by the US Bureau of Labor Statistics. It includes those that meet the strict definition of unemployment in the U-3 (the BLS’s “official unemployment rate”), but it also adds in the following three important groups:

  • Discouraged Workers — those who have given up looking for a job because they are convinced they aren’t available
  • Marginally Attached Persons — those who are neither working nor looking for work, but indicate they want a job and have looked for work sometime in the last year
  • Part-time Workers — those who say they would like to be working more, but for economic reasons could only find part-time work

This obviously is a much more comprehensive view of unemployment, but the interesting thing is that even it shows an approach to near pre-Recession levels.

Taken all together, it does seem like the economy is approaching some reasonable definition of full employment, and while at the same time it must be conceded that the Labor Force Participation rate is concerning, much if not most of that phenomenon appears to be heavily linked to the retirements of the Baby Boomer generation. So, we believe that a strong case can be made for a slowly healing labor market in the US. And if indeed we are approaching some functional level of full employment, then wage inflation should be the next logical step for the economy. In fact, we are already starting to see signs of upward pressure on wages and that has important implications for the near-term future of the U.S. economy.



“Beyond Distrust: How Americans View Their Government,” Pew Research Center, November 23, 2015

“The Chart Obama Haters Love the Most,” Qz.com, November 4, 2014

“Labor Force Statistics from the Current Population Survey,” BLS.gov, May 24, 2016

 Video: “Full Employment: Are We There Yet?” Broadridge Investor Solutions, Inc., copyright 2016