8 PART 1: RECENT ECONOMIC AND FINANCIAL DEVELOPMENTS How Tight Is the Labor Market? Any assessment of labor market tightness is The fact that the LFPR for prime-age men remains inherently uncertain, as it involves comparing current below its pre-recession levels might suggest that slack labor market conditions with an estimate of conditions remains along this dimension; however, the lower that would prevail under full employment, where the level of the LFPR for prime-age men primarily seems latter circumstance cannot be directly observed or to reflect the continuation of a decades-long secular measured and can change over time. Many economists decline rather than a cyclical shortfall in their LFPR. In would describe the labor market as being at full addition the u-6 measure of labor utilization --which employment when the unemployment rate has reached includes the unemployed, those marginally attached an"equilibrium"level, sometimes called the natura to the labor force, and those employed part time who rate of unemployment or the longer-run normal rate of would like full-time work-rose even more steeply unemployment In judging the level of full employment, than the unemployment rate during and immediately one may also consider additional margins of labor after the recession and has since recovered to near utilization-including the labor force participation rate its pre-recession level. Although there is substantial (LFPR), the share of workers employed part time who uncertainty about the trends in each of the components would like to be working full time, and individuals of U-6, its current level can be cautiously interpreted who are classified as marginally attached to the labor as consistent with a labor market close to full force--as compared with trends in these measures employment While the uncertainty around the"normal"trends in One can also look at less-direct indicators of labor all of these variables is substantial, the labor market market tightness. For example, the share of small in early 2018 appears to be near or a little beyond full businesses with at least one job opening that they view as hard to fill is now close to its record levels in the late The unemployment rate is now somewhat below 1990s(as seen in the black line in figure B),consistent most estimates of its natural rate. Specifically, the with the notion that as the labor market tightens, unemployment rate in January, at 4.1 percent, is businesses find it increasingly difficult to hire additional 12 percentage point below the median of Federal Or workers. Similarly, survey measures of households Market Committee(FOMC) participants'estimates of the longer-run normal rate of unemployment, which Galbis-Reig, Christopher Smith, and William Wascher(2014), percent as of the Labor Force Participation: Recent Developments and December 2017 FOMC meeting. The unemployment Future Prospects, Brookings Papers on Economic Activity, rate is also about v2 percentage point below the uploads/2016/07/Fall2014BPEA Aard Congressional Budget Office's(CBO)current estima Estimates of trend LFPR are also prowided by the CBo in their of the natural rate; by this measure, the labor market is recurring publication The Budget and Economic Outlook and about as tight as it was in the late 1980s but less tight its updates than in the late 1990s(figure A). That said, the median of FOMC participants' estimates of the longer-run A. Unemployment rate gap normal rate of unemployment and the CBOs estimate Quarterly Percent of labor of the natural rate of unemployment have both been revised down by about 1 percentage point over the past indication of the substantial uncertainty surrounding estimates of the "full employment"rate of As discussed in the main text, the lfPr has been presenting an important cyclical improvemen roughly unchanged, on net, over the past four year relative to its declining trend. While estimates of the trend LFPR are subject to substantial uncertainty and mong analysts, the current level of the LFPR is relatively close to many estimates of its trend LINLLLLLLLLLLLLLLLLLLLLILLI」 1981198519891993199720012005200920132017 1. As another indication of this uncertainty FOMC participants'estimates of the longer-run normal rate of NOTE: The unem nt rate gap is the un unemployment was 4.3 to 5.0 percent in December 2017 Congressional Budget Office's estimate of the natural rate of unemploymer ars indicate periods of business recession as defined by the For a variety of approaches to assessing the lev National Bureau of Economic Research of trend LFPR and the associated range of estimates, see SOURcE: For unemp Stephanie Aaronson, Tomaz Cajner, Bruce Fallick, Felix rate of unemployment, Coment rate. Bureau of Labor Statistics: for natural gressional Budget Office: all via Haver Analytics.8 Part 1: Recent Economic and Financial Developments The fact that the LFPR for prime-age men remains below its pre-recession levels might suggest that slack remains along this dimension; however, the lower level of the LFPR for prime-age men primarily seems to reflect the continuation of a decades-long secular decline rather than a cyclical shortfall in their LFPR. In addition, the U-6 measure of labor utilization—which includes the unemployed, those marginally attached to the labor force, and those employed part time who would like full-time work—rose even more steeply than the unemployment rate during and immediately after the recession and has since recovered to near its pre-recession level. Although there is substantial uncertainty about the trends in each of the components of U-6, its current level can be cautiously interpreted as consistent with a labor market close to full employment. One can also look at less-direct indicators of labor market tightness. For example, the share of small businesses with at least one job opening that they view as hard to fill is now close to its record levels in the late 1990s (as seen in the black line in figure B), consistent with the notion that as the labor market tightens, businesses find it increasingly difficult to hire additional workers. Similarly, survey measures of households’ Any assessment of labor market tightness is inherently uncertain, as it involves comparing current labor market conditions with an estimate of conditions that would prevail under full employment, where the latter circumstance cannot be directly observed or measured and can change over time. Many economists would describe the labor market as being at full employment when the unemployment rate has reached an “equilibrium” level, sometimes called the natural rate of unemployment or the longer-run normal rate of unemployment. In judging the level of full employment, one may also consider additional margins of labor utilization—including the labor force participation rate (LFPR), the share of workers employed part time who would like to be working full time, and individuals who are classified as marginally attached to the labor force—as compared with trends in these measures. While the uncertainty around the “normal” trends in all of these variables is substantial, the labor market in early 2018 appears to be near or a little beyond full employment. The unemployment rate is now somewhat below most estimates of its natural rate. Specifically, the unemployment rate in January, at 4.1 percent, is ½ percentage point below the median of Federal Open Market Committee (FOMC) participants’ estimates of the longer-run normal rate of unemployment, which was reported to have been 4.6 percent as of the December 2017 FOMC meeting. The unemployment rate is also about ½ percentage point below the Congressional Budget Office’s (CBO) current estimate of the natural rate; by this measure, the labor market is about as tight as it was in the late 1980s but less tight than in the late 1990s (figure A). That said, the median of FOMC participants’ estimates of the longer-run normal rate of unemployment and the CBO’s estimate of the natural rate of unemployment have both been revised down by about 1 percentage point over the past few years, one indication of the substantial uncertainty surrounding estimates of the “full employment” rate of unemployment.1 As discussed in the main text, the LFPR has been roughly unchanged, on net, over the past four years, representing an important cyclical improvement relative to its declining trend. While estimates of the trend LFPR are subject to substantial uncertainty and differ among analysts, the current level of the LFPR is relatively close to many estimates of its trend.2 How Tight Is the Labor Market? 1. As another indication of this uncertainty, the range of FOMC participants’ estimates of the longer-run normal rate of unemployment was 4.3 to 5.0 percent in December 2017. 2. For a variety of approaches to assessing the level of trend LFPR and the associated range of estimates, see Stephanie Aaronson, Tomaz Cajner, Bruce Fallick, Felix 1 + _ 0 1 2 3 4 5 Percent of labor force 1981 1985 1989 1993 1997 2001 2005 2009 2013 2017 A. Unemployment rate gap Quarterly NOTE: The unemployment rate gap is the unemployment rate minus the Congressional Budget Office's estimate of the natural rate of unemployment. The shaded bars indicate periods of business recession as defined by the National Bureau of Economic Research. SOURCE: For unemployment rate, Bureau of Labor Statistics; for natural rate of unemployment, Congressional Budget Office; all via Haver Analytics. Galbis-Reig,Christopher Smith, and William Wascher (2014), “Labor Force Participation: Recent Developments and Future Prospects,” Brookings Papers on Economic Activity, Fall, pp. 197–275, https://www.brookings.edu/wp-content/ uploads/2016/07/Fall2014BPEA_Aaronson_et_al.pdf. Estimates of trend LFPR are also provided by the CBO in their recurring publication The Budget and Economic Outlook and its updates