Friday, November 21, 2014

Is Utah at Full Employment?

Carrie Mayne, Chief Economist

This is the million-dollar question. With an unemployment rate below four percent, it is a logical question to pose, but not an easy one to answer. Full employment isn’t a specific number but rather an economic concept. When an economy has reached full employment, the only type of unemployment that remains is that which occurs as people move from one job to the next, i.e. frictional unemployment. Under those conditions, no excess supply of labor exists. There are essentially no job seekers experiencing ongoing unemployment due to unsuccessful job searches.
 
Given the evidence available to us, I would conclude that we are very close to being at full employment, and here are my reasons why:
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  1. A large and growing share of unemployment is likely frictional. Two years ago, only 33 percent of the unemployed found a job within 6 weeks. Today, more than 45 percent find jobs within that window of time.
  2. Long-term unemployment is declining. The share of long-term unemployment to the total unemployed has decreased over the last two years from 31 percent to 21.The decreasing presence of long-term unemployment signifies a decline in the excess supply of labor.
  3. Labor force participation is leveling off or declining. After a precipitous, recession-driven decline from a pre-recession average of 72.1 percent to a low of 67.5 percent in November 2011, participation began to finally show signs of recovery. The upward trend continued until March of this year when we again started to see a decline that has continued through summer to now.  Unless this decline is annulled by data revisions in early 2015, we can interpret this downward trend as yet another sign that the labor market may be approaching a saturation point. 
  4. Job growth has leveled off.  Job counts from the employment census (which takes us through the second quarter of 2014) show that job growth has slowed down slightly in 2014. While growth in 2013 was 3.3 percent, current and projected numbers imply 2014 will register close to 3.0 percent. Employers can only add new jobs if there are new workers available to fill those jobs, so the slow down may be due to a lack of labor supply. 
Essentially, Utah’s economy is showing all the signs of full employment. Except for one. An important one. Wages.



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Typically in a tight labor market when worker availability diminishes, wages increase in response to that scarcity. Utah has experienced this phenomenon as recently as the pre-recession boom. Yet today, when all other signs indicate Utah is operating at full employment, wage growth is remarkably low. Why is this? Wages do tend to lag employment growth, so it could be that the wage response is yet to come on the horizon. An additional explanation may be that workers have yet to realize that market power has shifted in their favor and acted accordingly by requesting pay increases or searching for better-paying positions.

But for the weakness in wage growth, all signs indicate that Utah is indeed approaching full employment. The significance of this milestone for the average Utahn is that the time is right to ask for that raise, apply for that promotion, or search for that next big career move.  

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