Monday, April 6, 2015

Is There Slack in the Utah Labor Market?

By Jim Robson, Senior Economist

Slack in the labor market includes more than the oft-cited unemployment rate. A more comprehensive measure of labor market slack is the “labor underutilization rate,” which is composed of three elements. First, the jobless rate — persons who are unemployed and activity seeking work in the last month. Second, the “marginally attached” to the labor force — persons who want to work and have looked for a job during the last year, but did not seek employment during the previous four weeks. Finally, the “involuntary part-time” — persons who are working part-time, but want a full-time job.


Figure 1 shows the labor underutilization rate for Utah and the U.S. on an annual basis for the last 14 years. The lowest rates for Utah were from 2006 to 2008, ranging from 5.0 percent to 6.2 percent. This occurred during the housing bubble prior to the Great Recession. In 2010, as a result of the recession, Utah’s labor underutilization rate averaged a high of 15.1 percent. This rate has fallen during the economic recovery each year, coming down to 8.2 percent in 2014.



In Figure 2, Utah’s labor underutilization is broken down into its three component parts: unemployment, marginally attached and involuntary part-time. The percentage rates seen for Utah from 2006 through 2008 are instructive, indicating how low these various measures can go in a tight labor market. None of these measures can ever actually fall to zero. In economic theory there is a “natural rate of unemployment,” which is the lowest jobless rate consistent with balanced growth, plenty of job opportunities and low inflation. No one in the economics profession knows exactly what level this natural rate is for a given labor market.

The Utah labor underutilization rate in 2007 of 5 percent was likely below the so-called natural rates for unemployment, marginally attached and involuntary part-time with too much tightness in the labor market. These rates are so low that they cannot be sustained in a balanced Utah economy and labor market given our demographic characteristics and economic structure.

I do believe that Utah’s recent history does support the notion that our labor underutilization rate can continue to move down toward around six percent as evidenced by the 2006 rate of 5.8 percent and the 2008 rate of 6.2 percent. If this economic expansion continues in 2015 and 2016, as now expected, an additional improvement and reduction of slack in the Utah labor market of around 2 percent in the underutilization rate is possible.

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