Full Employment: What Exactly Does That Mean?

If you are an economist or in talent acquisition, the topic of full employment hits home right now, heck — it might even be something that keeps you up at night. A general and easy to understand definition of full employment is the condition in which virtually all who are able and willing to work are employed. I can’t speak to what economists are seeing, but from the talent acquisition side, we’re finding the perfect candidate is harder and harder to find, response and apply rates are decreasing, and hiring managers are becoming more and more…difficult (yeah, let’s go with that descriptor) to deal with.

The tables have definitely turned and candidates seem to have the upper hand. Upper wage limits for some of the most in-demand jobs continue to increase. For talent acquisition folks, our jobs are infinitely harder as we near full employment. But are we really there just yet?

THE NUMBERS
You might remember that in May, the unemployment rate hit a 16-year low at 4.3%. The last time I did my math, 4.3% is greater than 0%. After years of history, analysis and trend data, governments and central banks set guidelines for what full employment looks like for their society. The United States Federal Reserve currently has this full employment number set somewhere near 4.7% and 5.8%.

So, how can our labor force be considered “full” when there is still a significant amount of American workers unemployed? Enter the degreed economists.

HOW FULL IS FULL?
Economists have the difficult job of determining how full, is full. Most macroeconomists agree that the unemployment rate can only go so low. Too much push below an (unobserved) “natural rate” of unemployment and that number will undoubtedly rise again, along with prices — aka inflation.

0% unemployment is impossible, therefore even healthy economies have some level of unemployment. Because of this, it is helpful to look at the three main components that make up the natural rate of unemployment, (1) Frictional Unemployment, (2) Structural Unemployment, and (3) Surplus Unemployment.

FRICTIONAL UNEMPLOYMENT
This component of the natural unemployment rate occurs when recent graduates first enter the labor force after college, or when a worker relocates prior to lining up his/her next job. Basically, it’s a natural state of unemployment that can occur when workers are in-between jobs. We can expect to see frictional unemployment rise as baby boomers continue to reach retirement age and drop-out of the labor force.

STRUCTURAL UNEMPLOYMENT
Structural unemployment occurs in a healthy and evolving economy when workers’ skills and employers’ needs are mismatched. This component of the natural unemployment rate is also seen when technological advancements displace workers. Keep an eye on this as we move more and more into artificial intelligence, machine learning and automation.

SURPLUS UNEMPLOYMENT
The final component of the natural unemployment rate is surplus unemployment. This type of unemployment is a product of government intervention in the form of regulations and price control. Unions and the negotiations of higher wage contracts can also cause workers to be terminated. As companies must work within the payroll budgetary restraints of higher wages, workers are displaced to offset the cost.

SO WHAT NOW?
Ultimately, The Fed has two goals: reach full employment and keep inflation at 2%. The ideal balance is to have the labor market as tight as it can be without prices running away. Just this past Wednesday, The Fed raised interest rates from 1.0% to 1.25% for the second time in three months. 0.25% doesn’t sound like a lot, but considering the billions and billions of dollars our banks borrow, it adds up quickly. Don’t be too quick to judge though. The Feds are winding down nearly a decade of economic stimulus and trying to correct a nearly $4.2 trillion balance sheet.

WRAPPING IT ALL UP
If you are conflicted with the idea of full employment and the consensus feeling among many Americans that they are still uneasy in their economic stability, you are not alone. If anyone who wants a job can find one, shouldn’t we all be happy? Not necessarily; workers being happy and workers finding a job are two different things. According to Douglas Holtz-Eakin, the president of the American Action Forum, “People are fully employed and fully unhappy because wage growth is too slow. That’s a fact.”

There’s a reason most of the smart people taking care of our monetary policies have not declared the U.S. at full employment. While unemployment numbers look good, wage growth is still mostly stagnant. Josh Bivens, the director of research at the Economic Policy Institute, says, “If we start tightening up too early and we never see sustained upward wage pressure, I think we could really lock in slow productivity growth. That would just be yet another bad scar of the Great Recession that we didn’t need to tolerate.”

Ultimately, it’s a delicate balancing act. When — and if — we ever meet true full employment will only be known by future scholars and economists studying this exact moment in time. Who knows, maybe even someone like me will be writing a blog post in the future about that exact moment in 2017 when the U.S. economy was fully employed. Mind blown.