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Listener Ian Howars asks:
What is needed to have 100% employment in America? Is it possible to have 100% employment?
The U.S. labor market is weakening, but just last year the unemployment rate hit 3.4%, a 50-year low.
It was an impressive recovery after millions of people lost their jobs during the COVID-19 pandemic. Yet even during times of strong economic growth, the unemployment rate never reached 0%.
And it probably never will, economists say, because there will always be workers out there looking for new jobs. This “frictional unemployment” includes people who have resigned their position before finding a better one, or graduates searching for their first job.
Instead, policymakers and the Federal Reserve strive for full employment. That’s when every worker who wants a job can find one, and employers are able to set wages at a rate that keeps inflation at a manageable level. Basically, it’s the sweet spot for the economy. Full employment is part of the central bank’s dual mandate (the other being price stability).
For the Fed, an unemployment rate of about 4% would signal full employment, Bethune said. At 4.2% as of August, we’re still close to it.
The unemployment rate measures the percentage of people over 16 who aren’t employed at the moment, but are able to work and looking for a job. Unemployment ticked up last month in part because folks who had given up finding a job reentered the workforce. But it’s not the only way to gauge the health of the labor market.
The employment-to-population ratio measures the number of workers that are employed as a percentage of all working-age people in the country. Some economists like to define “working-age” as 25 to 54 years old, since many younger people are in college and many older people are getting ready to retire. The highest employment-to-population ratio the U.S. has reached is about 82%, back in 2000. You can also look to the labor force participation rate for those who are 25-54 years old, which hit its peak in 1999 at 84.6%. The unemployment rate, around this period, hovered between 3 and 4%.
In 1999, employment in managerial and professional specialty occupations accounted for about half of that year’s growth. Those jobs included computer systems analysts, computer scientists and social workers. The dot-com bubble fueled economic growth, but employment declined following when the bubble burst, Marinescu said.
The U.S. would maybe be able to reach 100% employment if it were operating a planned economy, in which a central planner assigned jobs, said Brian Bethune, an economics professor at Boston College.
Even though 100% employment isn’t likely, frictional unemployment is perfectly normal, even necessary, for a healthy economy. People need the time to find just the right fit, Marinescu said.
In industries like the tech sector, businesses are constantly launching or closing down. Some turnover can stimulate economic growth, he added, if it means people are leaving unproductive companies for more promising ones.
So some unemployment is good. But policymakers will step in when discrimination and inequity skews the labor market.
Subsidized employment programs, for example, have helped more Black Americans stay in the labor force, according to a report from Georgetown’s Center for Poverty and Inequality. Though in August, the Black unemployment rate was 6.1%, far higher than the 3.8% rate of white unemployment.
“Subsidized employment is basically when the government is subsidizing part or all of a worker’s wages for a set period of time, while also providing on-the-job training and other, what we call ‘wraparound supports,’ like transportation and child care assistance,” said Kali Grant, a co-author of the Georgetown report, told Marketplace last year.
The Supreme Court banned affirmative action in college admissions last year, a decision that could reverberate throughout U.S. workplaces. More people could start filing lawsuits against race-conscious policies, while some companies are pulling back on diversity, equity and inclusion programs.
Economists tend to be less concerned with frictional unemployment than structural unemployment, which is when there’s a mismatch between the types of jobs available and job seekers’ skills, Marinescu said. Policymakers can reduce this form of unemployment through job training, she added.
Then there’s cyclical unemployment, Marinescu said, when people are out of work because of a recession or other economic changes. One way central banks can combat cyclical unemployment is by lowering interest rates, which the Fed did back at the beginning of the COVID-19 pandemic.
But lowering rates means that borrowing money will be cheaper, which could set off a new wave of inflation. The Fed is expected to cut rates this month amid weak employment data. The U.S. economy added 142,000 jobs in August, a weaker than expected figure, while June and July hiring numbers were revised downward by a total of 86,000.
“The problem is, historically speaking, the job market is not that bad, per se,” Mark Rossano, the founder and CEO of C6 Capital Holdings, told Marketplace.
Nobody said finding that economic sweet spot would be easy.
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