[by JB and Ben Spielberg]

Earlier today, Jared wrote:

“Look at the employment ratio; look at Andy Levin’s all-in slack measure (I’ll post something on this later)—they’re still signaling a job market that is unquestionably improving but is still far from full employment.”

In this post, we briefly explain some of the evidence that there’s far more labor market slack than is apparent from the unemployment rate alone.

The unemployment rate doesn’t capture workers who, because of a difficult job market, have stopped looking for work.  The labor force participation rate – the share of the population that is either working or actively looking for work – dropped off sharply during the recession, from about 66 percent to about 63 percent.  While some of those folks left for retirement, others–maybe a third to a half by some measures–can be enticed back into a more welcoming job market.

A number of prime-age workers (those between age 25 and age 54), for example, have dropped out of the picture. The figure below shows the employment-to-population ratio for workers in this age group.  Notice the five-percentage-point plunge it took during the recession; while it has nudged back up to just over 77 percent, it is still three percentage points beneath its pre-recession level.

The “total employment gap,” developed by economist Andy Levin, is another indicator of the amount of labor market slack.  The total employment gap accounts for three populations of potential workers: the unemployed (who are actively looking for jobs), those who have left the labor force but could potentially come back into it, and the number of workers with a part-time job who would rather have a full-time position.  Using high-end estimates of the “natural” number of workers in each category (see data note below), we estimate that the total employment gap is at least 2.4 percentage points.

It is therefore unsurprising that we’ve yet to see much in the way of wage growth–while the job market is steadily improving, we aren’t yet at full employment. It is essential that policymakers keep these broader measures of labor slack in mind.

Data Note: The Levin gap measure relies on estimates of the size of the “potential” labor force and the “natural rate” of unemployment from the Congressional Budget Office, as well as an estimate, based on the pre-recession trend, of the “natural” number of full-time-equivalent involuntary part-time workers.

**Republished with the permission of Jared Bernstein.

Standard rant on standard errors

I keep hearing this strange refrain about this Friday’s jobs numbers and it’s freaking me out a little. Important people pulling important levers seem to have decided that August’s job growth is really decisive in some cosmic way that’s going to resolve any lack of clarity regarding job market slack and the Fed’s plans for rates.

I yield to no one on my obsession with the monthly jobs numbers. Once, when I was in China adopting one of my daughters, I stopped the proceedings to check the release (and I named her U-6, in honor of that important indicator of underemployment–JK! Who would name their kid after a slack measure? Maybe “Wage Growth” or “Full-timer”). But I well know that one month does not a trend make and that given the volatility and revisions history of a high-frequency indicator like this, you should never weight a monthly result too heavily.

Then there’s the standard error. The confidence interval for the monthly change in payrolls is plus or minus 105,000 jobs. Let’s say we get another on-trend report of 220K net jobs added in August. The 90-percent confidence interval on that change ranges from 115K to 325K, i.e., there’s a 90-percent chance that the true August change is within this interval. Think a bit about how these different extremes would change the discussion on Friday.

Don’t get me wrong–there’s important info in the jobs report, which is why I and others blather on about it on jobs day. And if August is another month in what’s been a pretty steady string of solid reports, that will legitimately signal that the job market appears to remain on track. But the idea that it’s a deal maker or breaker for big decisions like the Fed’s liftoff strikes me as downright weird.

Comments:

Jared:
You said “The 90-percent confidence interval on that change ranges from 115K to 325K, i.e., there’s a 90-percent chance that the true August change is within this interval.”

But this is a misinterpretation of the meaning of a confidence interval. The true August change either is or is not within the CI. The correct interpretation is that for every 100 CIs, 90 contain the true value and 10 do not.

The BLS statisticians, who know there stuff, describe it the same way I do, I think: “These figures do not mean that the sample results are off by these magnitudes, but rather that there is about a 90-percent chance that the true over-the-month change lies within this interval.” [my bold:http://www.bls.gov/news.release/empsit.tn.htm