By Federal Reserve chair Jerome Powell recently emphasized that the US economy remains resilient, in large part due to a labor market holding steady, despite growing uncertainty. The direct words Powell used to describe the current situation were a kind of “zero employment growth equilibrium.” There is limited hiring, yes, but also limited layoffs. When combined with persistently low jobless claims, policymakers seem to be of the opinion that conditions remain stable, even strong, in toto. On paper, we rest very near full employment. Unfortunately, this is only part of the story. Upon digging, the labor market shows signs of strain.
Hiring has markedly slowed, and recent data and surveys point to noticeably weaker hiring conditions compared with the last decade. Some reports show outright job losses along with rising unemployment, challenging the notion of continued strength. Yet layoffs remain subdued, and even jobless claims are staying low, signaling that firms are holding onto their workers. This “low-hire, low-fire” labor market appears stable, but it lacks forward momentum. What we appear to have is an economy that is neither collapsing nor improving — drifting, not growing.
And so we reach this strange purported equilibrium. Labor markets are not collapsing, but they are not advancing with any force, either. This stability is stagnant. Powell did add that this stagnation “does have a feel of downside risk, and it’s not kind of a really comfortable balance,” but alarm bells are not ringing in DC yet. When looking at employment data, this strange picture emerges. Here, then, we see the limits of employment data, like the concept of full employment.
Investopedia explains full employment like this: “Full employment exists when all willing and available skilled and unskilled labor is being used.” This is not to say that the unemployment rate is truly zero percent, but it is meant as a theoretical goal. Some people will be willfully unemployed for various reasons. A laid-off mechanical engineer will take some time to look for new jobs in his field before considering other lines of work. The nurse who quits due to understaffing will not necessarily jump into the same situation at a different hospital, but might hold out for a better work environment. Excluding these individuals, the rate should reach zero percent. Often, full employment is defined as an unemployment rate sitting between four and six percent. The US unemployment rate for February was 4.4 percent, falling within the full employment range. Here we see one source of “optimism” for Washington.
As is often the case, this indicator cannot capture the uneven, localized, and shifting nature of real work. In practice, the labor market is a process that cannot be captured in a single snapshot. Workers search, firms adjust, industries expand and contract, and skill levels increase and decrease. At any given moment, some sectors are growing while others decline. The same applies to regions. These details are often smoothed over by aggregates. This means that telling us where the average stands does not indicate how the system itself functions on the ground. A stable national picture can hide underlying volatility. Balance in the aggregate may in reality be nothing but a series of offsetting imbalances.
For example, consider underemployment. A man desiring full-time work settling for part-time hours is still employed. A college graduate working retail despite a degree suited for investment analysis is still technically employed, despite underutilization of his skillset. These distinctions matter for economic well-being, despite hardly registering in headline statistics.
Even the data themselves can be misleading. Employment figures are often revised, sometimes drastically. Many times these revisions show weaker job creation than originally reported, changing the narrative from strength to concern. Recent revisions from the Bureau of Labor Statistics have erased hundreds of thousands of previously reported jobs — in some cases, completely flipping growth months into contraction months. None of this is helpful nor is it a good reason for optimism.
Likewise, structural forces reshape labor demand. Technological changes and the ability to switch jobs affect the market in ways not so quickly detectable. The goal is not mere employment but good matches between employers and employees to maximize value creation. People remaining in a job because it is increasingly difficult to switch does not signal health. When necessary reallocation is not happening, we lose out on potential growth and rising efficiency, even if unemployment figures remain stable.
When just looking at unemployment figures, it is easy for a policymaker to confuse full capacity with true economic vitality. This misreading has its consequences. Policymakers, equipped with the specious belief that they can beneficently direct the economy, might focus on restricting demand so as to avoid inflation. Or they might defer to current policies that are actually weakening the economy, but only in a less obvious way (or in such a way as to only become manifest months later in a “revision”).
With all this in mind, we must be careful how we choose to measure economic health. All national statistics provide somewhat useful summaries, but cannot replace dispersed, local knowledge embedded in actual market activities. The economy does not employ “labor” in the abstract, but rather it employs specific people, with specific skills, in specific places, at specific times, for specific reasons. When this complexity gets reduced to a single number like the unemployment rate, we lose clarity for the sake of a simplistic metric.
An economy can appear to be fully employed on paper while being less dynamic, less accessible, and less resilient in practice. Headlines might read “strong” or “stable”, but the economy is more than aggregate figures. It is a web of individual choices and adjustments, and those adjustments are real and important, but not fully captured in a headline number.