Unemployment Isn’t What It Used to Be

The low rate doesn’t take account of low labor-force participation. Wages are a better indication of slack

By Neel Kashkari. He is president of the Federal Reserve Bank of Minneapolis. This gets at the relationship between inflation and unemployment. How low can unemployment go before inflation gets too high? Maybe we should look at some other statistic instead of the unemployment rate. Excerpts:

"In 2015 Federal Open Market Committee participants estimated that unemployment couldn’t go below 5.1% without triggering inflation. The rate is now 3.6%, which means 2.4 million more Americans have found work, yet inflation remains low."

"the number of Americans of prime working age—25 to 54—who consider themselves in the labor force is 2.3 million lower than it would be if participation was as high as in 2000."

"more than 70% of people who got jobs in April indicated the previous month that they weren’t looking for work."

"in recent years people who previously had considered themselves disabled have been entering jobs."

" the rate of compensation growth is the best way to determine how near the labor market is to maximum employment. The price of labor—wages and other compensation—should rise at a rate roughly equal to productivity growth plus inflation. With productivity growth climbing to 1.5%, maximum employment and stable inflation will likely occur when wages are rising at a sustained rate of about 3.5%. Today wage growth is only around 3%, meaning there is likely still slack in the labor market: The economy hasn’t yet reached its capacity."

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