COTW: The Labor Market Has Finally Recovered

January 9, 2018

The chart below can be downloaded here.

 

Sluggish wage growth in the face of low headline unemployment has puzzled and frustrated economists in the wake of the Great Recession. Part of the problem is headline unemployment (the BLS refers to this as U3) does a poor job of measuring true labor utilization as it excludes discouraged, marginally attached and part-time workers who would prefer full-time work. The net result is U3 unemployment overstates labor market tightness.

 

The broader underemployment measure (U6), which includes these extra groups, appears to be a far better metric based on its tighter historical relationship with subsequent wage growth (see chart on left). Late last year the underemployment rate (U6) declined to a decade low of 8%. After years of disappointing wage growth, the labor market has finally recovered to the point where Americans should start to see higher wages in 2018.

 

 

 

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