Slacker Market

How much slack is there in the labor market?

Source: Wikipedia

It depends what you mean by slack. Most people think the unemployment rate is a good measure of slack, and it’s intuitively appealing: divide the number of job-seekers by the number of people in the workforce, and that tells you what percent of people want to work, but can’t find a job. After falling for the last five years, the unemployment rate—currently 5.9%–is almost back to its post-World War II average of 5.8%.

Source: St. Louis Fed

But is this normal? Just because something’s average doesn’t make it right. The labor market has changed a lot over the last 50 years. We need to compare current unemployment with some normal level to understand how much slack there is. A pair of economists at the Cleveland Fed studied six different ways to estimate normal unemployment. As you might expect, this level changes over time, and sometimes these models disagree. But right now they’re fairly close: normal unemployment is about 5.5%. We’re almost there.

Such studies may seem esoteric, but they have a lot of influence on policymakers. Most Fed Governors are academics now, not business-people or bankers. As they try to balance issues of economic growth, inflation, financial stability, and the political demands of the job, understanding labor market slack will help them with their own high-wire act.

Douglas R. Tengdin, CFA
Chief Investment Officer
Phone: 603-224-1350
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By | 2017-07-17T12:23:16+00:00 October 17th, 2014|Global Market Update|0 Comments

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