The Unemployment Rate and the Normal Rate of Unemployment

The Unemployment Rate and the Normal Rate of Unemployment

For the first time in the five-and-a-half years that Barack Obama has been president, the national unemployment rate has fallen to 5.9 percent. One has to go back to the summer of the last year of George W. Bush’s presidency to see unemployment below 6 percent (it went as high as 10 percent  during the recent recession).

Sounds like progress.

There’s more good news.

There have been some months when the unemployment rate has dropped, not because more people found jobs, but because many people simply gave up looking. They dropped out of the active labor force, from a statistical perspective, and thereby reduced the percentage of unemployed workers.

But that didn’t happen this time. According to the Bureau of Labor Statistics, “The civilian labor force participation rate, at 62.7 percent, changed little in September.” In other words, the reduction in the unemployment rate reflects an actual increase in people finding employment, not a decrease in those seeking it.

So how “good” is 5.9 percent unemployment?

The Board of Governors of the Federal Reserve System indicated this past June that its estimate of “the long-run normal rate of unemployment” for the next few years is between 5 and 6 percent (with the dominant view somewhere below 5.5 percent). The unemployment rate, on average, has crept down about 0.1 percent per month over the last year. If that trend were to continue, we would reach that “normal rate” of unemployment early in 2015.

Of course, accepting unemployment at something over 5 percent doesn’t sit well with everyone. Some argue that our target should be 3 to 4 percent. Just before the most recent recession, unemployment was slightly over 4 percent.

The basic balancing act generally acknowledged by economists is that, at some point, as unemployment goes down, the price of labor goes up. When there aren’t lots of hungry unemployed workers seeking employment, employers feel pressure to keep their current employees happy (and have to spend more per worker to bring new employees on board). This translates into demands for increases in wages and benefits, demands that, to some extent, must be met to hold one’s workers. These increases, of course, cost money. Those costs, in turn, are presumed to be passed on to the larger economy through the increased price of goods and services.

The word for all of that is inflation.

The debate about a sustainable rate of unemployment, then, is about maintaining a healthy balance between unemployment and inflation. A labor market that is tight enough to put a little upward pressure on wages and benefits is a good thing. A labor market so tight that serious bidding wars arise between employers for an all-too-scarce supply of available workers is viewed as a bad thing.

What’s the magic number? Is it 5.5 percent? Or 5.2 percent? Or something much lower? Or something higher?

No one really knows; that’s why the Federal Reserve reports ranges based on the judgments of the participants in the Federal Open Market Committee.

Here’s something I do know:

Summary statistics, like the overall unemployment rate, provide important information about the macro trends in our economy. But most of us, working at the local level, aren’t as preoccupied with those macro trends as we are with the much more personal level of the unemployed in our community.

While I can’t know those realities for your community, there are some numbers below the topline numbers in the employment report that can help us think about what we need to do in our cities. I’ll turn to those next.

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