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  April 4th, 2017 | Written by

The US Labor Market: How Tight Is It Really?

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  • If the unemployment rate falls further, the labor market could become too tight.
  • An overly tight labor market would push up wages and prices.
  • New method shows current unemployment rate is 0.3 to 0.4 percent higher than at past labor market peaks.

The jobs report for February from the Bureau of Labor Statistics showed an unemployment rate of 4.7 percent, considerably lower than the historical average of 5.8 percent since 1948. If that the rate falls even further, it is possible that the labor market could become too tight, pushing up wages and prices.

Recent research from the Federal Reserve Bank of San Francisco raises the question of whether straight comparisons of unemployment levels over time yields meaningful conclusions. Might that historical comparison be flawed due to changing demographics over time? For example, the shrinking proportion of young people in the work force, due to the aging of the overall working population, would yield a lower unemployment rate over time because younger workers generally have higher unemployment rates.

The research presented by the San Francisco Fed applied a new methodology that accounts for demographic changes. The study showed that that three demographic changes had roughly equal contributions to the decline in the unemployment rate: the aging of the baby boom generation, a decline in young workers’ joining the work force since the early 1980s, and an increase in women’s labor force participation until the mid-1990s.

After applying this new method to adjust for demographic changes in the labor force, “the current unemployment rate is still 0.3 to 0.4 percentage point higher than at past labor market peaks,” the paper concluded. “This indicates that the labor market may not be quite as tight as the headline unemployment rate suggests.”

The authors caveat that their analysis focuses only on the effects of demographics on aggregate unemployment. Other recent research has shown that other labor market changes also may have affected aggregate unemployment since the mid-1970s.