5.2 percent unemployment is the new standard for full employment

[Carlisia Campos]

NEW YORK (CNN/Money) - Though U.S. unemployment is at its highest level since July 1994, it's still a lot lower than its peaks after recessions in the early 1980s and 1990s.
But this is the aughts, not the '80s or '90s; the economy is different, and most economists say the standard for unemployment is different, too.
Unemployment hit 6.1 percent in May, the Labor Department said recently. While the rate was nearly a nine-year high, it still was a far cry from the 7.8 percent peak it hit after the 1990-91 recession and the nasty 10.8-percent peak it hit in 1982.

In fact, 6 percent unemployment was -- in the early 1990s -- considered by many economists to be "full employment," or labor-market nirvana, the level at which the economy was growing strongly, but not so strongly that it fueled inflation.
That level is probably much lower today, however -- the Congressional Budget Office, for example, believes 5.2 percent unemployment is the new standard for full employment.
"I've spent the past couple of days in Washington, talking to people at the Federal Reserve and the [White House] Council of Economic Advisers, and this issue came up," said Sung Won Sohn, chief economist at Wells Fargo & Co. "The consensus seems to be that an unemployment rate representing full employment is somewhere between 5 and 5.5 percent."
There are several reasons that the "perfect" unemployment rate has fallen. For one thing, the development of radical new technologies in the 1990s created new industries and job opportunities, even as they cut the amount of labor businesses needed to produce goods. That higher productivity pushes overall prices lower, meaning higher employment will be less likely to fuel inflation.
And the labor force has grown much larger; 6.1 percent unemployment in 1994 meant 7.9 million people were out of work; now, 6.1 percent unemployment means 9 million people are jobless.
Gus Faucher, senior economist at Economy.com, also pointed out that the labor force has grown older and more skilled, meaning workers should stay employed longer and be unemployed for shorter periods of time.
"The 'full employment' unemployment rate is about 5 percent," Faucher said. "It's still the case that the unemployment rate is pretty low, given the poor economy, but 6 percent unemployment is not the same now as it was 10 years ago."
Most economists believe the economy needs to grow to its full potential -- a rate of about 3.5 percent per year -- for a sustained time, possibly a year or more, before unemployment falls back to 5 percent.
Some economists, however, think unemployment could be even lower. It fell all the way to 4 percent in 2000 and occasionally dipped even lower, without triggering inflation.
While many economists dismiss this super-low unemployment rate as a symptom of the enormous stock and investment bubble of the late 1990s -- a situation unlikely to be duplicated any time soon -- others think it's possible to get back to that unemployment rate in a more stable environment.
"The full employment situation reinforces itself," said Jared Bernstein, a former Labor Department economist now with the Economic Policy Institute, and co-author of a recent book, "The Benefits of Full Employment," that argues that policy makers should aim for much lower unemployment. "When unemployment is that low, wages are growing broadly, and family incomes are rising. Wage-based demand growth keeps the economy growing at potential."

[Mark Herschberg]

I'm glad she posted. It does the following:
First, it's information. Burying your head in the sand won't make the situation any better, but having more knowledge can only help.
Second, this is actually good news. 0% unemployment is bad because there is no one to hire for expansion. 10% as full unemployment is bad because it means when the enconomy is humming along, 10% of the people will be out of work. Unless its near zero, the lower that number, the better.
--Mark

[Carlisia Campos]

If you don't care for these numbers, why do you care that I post them??? If you look, you'll find positive news that I've posted, maybe that'll cheer you up.
I've posted that because many discussions here were made based on the 6% unemployment figure beying the ideal rate.
A reduction of .8% doesn't really mean too much. As the article says, there are more jobs now than back in early 1990 in the US. One of the things it does mean is that it better reflects the feelings of people who are out there job searching, and helps us understand why it is so hard to find a job even though we were thinking we were at "full employment".
[ June 19, 2003: Message edited by: Carlisia Campos ]

[Axel Janssen]

ooops. sorry :roll:
Thought it was one of those:
"In 5 years 82.37% of all jobs will be in India"-posts so popular this days.
Was late. Going to delete my post. Next time will read more carefully.
In Germany they seem to think at the moment that our 'full employment' unemployment rate is 8% and rising every 5 years by 3%, because of "computers", rising economic exchange with eastern europe and other "evils" .
[ June 19, 2003: Message edited by: Axel Janssen ]

[Mark Herschberg]

Originally posted by Carlisia Campos:
I've posted that because many discussions here were made based on the 6% unemployment figure beying the ideal rate.

I don't recall one discussion based on 6% being the ideal unemployment rate. Can you post a link to the discussion?
I do that some people, including myself, have pointed out that 6% is quite low from a historical standpoint.
--Mark

[Tim Holloway]

More pertinent to us here is: "Did you get the 6% by trading J2EE positions for burger-flipper jobs?".

[Al Newman]

Carlisia Campos wrote:

Unemployment hit 6.1 percent in May, the Labor Department said recently. While the rate was nearly a nine-year high, it still was a far cry from the 7.8 percent peak it hit after the 1990-91 recession and the nasty 10.8-percent peak it hit in 1982.

That level is probably much lower today, however -- the Congressional Budget Office, for example, believes 5.2 percent unemployment is the new standard for full employment.

The 'full employment' rate seems a bit of a 'witch-doctor' formulae to me. If such a thing exists it depends so much on other things (such as the state of the welfare laws) that I don't put too much value on it anymore. I can't see why any 'perfect' rate couldn't be as low as 3% in an economy where productivity is strongly growing to soak up inflationary pressures.
Axel Janssen wrote:

In Germany they seem to think at the moment that our 'full employment' unemployment rate is 8% and rising every 5 years by 3%, because of "computers", rising economic exchange with eastern europe and other "evils" .

This is a perfect example of what I mean. Germany has loads of well-trained and productive workers, so why should 'perfect employment' be so much higher than in the US? A generation ago the equivalent figure for Germany would have been at most 2.5% (between 1960 and 1970). I think it's a complex matter but largely it's because Germany has onerous regulation which keeps labor from moving freely to the highest value jobs. Chancellor Schroeder has a huge job of reform to do. Here's hoping he's up to it, because if Germany becoems an economic powerhouse again we'll all be better off for the change....
Tim Holloway wrote:

More pertinent to us here is: "Did you get the 6% by trading J2EE positions for burger-flipper jobs?".

Or perhaps "What is the unemployment rate among software engineers and administrators?". My best guesstimate is that it's hit 40% or more in places like Silicon Valley, and maybe 25% in London....
Gawd, what is it with Florida, Tim?!!! I've looked at living in Tampa because you can live in a Taj Majal for $140K, but wages seem to be crap and you hear wild stories about no SE jobs down there every recession time!