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Guest contribution: “How far is it from full employment?”


Today, we are honored to present guest contributions written by the author Pavel Skripczynski, Economist of the National Bank of Poland. The views expressed here are those of the author and should not be attributed to the National Bank of Poland.


In June 2021, the number of non-agricultural employment is 4.4% below the pre-pandemic peak level. During the COVID-19 recession, which is most likely to occur in April 2020 but has not yet been announced by NBER, the employment rate was 14.7% lower than its pre-pandemic peak (Figure 1).

Figure 1. Employment during the COVID-19 recession and recovery

Note: The previous cycle averages and ranges refer to all post-war cycles, including the Great Recession and subsequent recovery.

Source: self-calculated based on BLS and NBER data.

There is no doubt that much progress has been made, but the labor market is still far behind full employment. How far? One way to solve this problem is to calculate the deviation of employment from its trend.According to the proposed method Aaronson et al. (2016), The non-agricultural employment trend level is given by the following formula:

E_tr = POP_tr X LFPR* x (1 – you*) X (B/Health Bureau)_tr,

where is it POP_tr Is the demographic trend, LFPR* Is the potential labor force participation rate, you* Is the natural unemployment rate and (B/Health Bureau)_tr It is the trend of the ratio of wages to household survey employment.Respectively variable E-E_tr It is the employment gap, which is a measure of the weakness of the labor market.obtain POP_tr I attach The latest CBO forecast To the historical data and use the HP filter proposed by Aaronson et al. to smooth the resulting sequence. (2016).in order to LFPR* with you*, Whether it’s historical or projected, I use Latest CBO estimate. At last, (B/Health Bureau)_tr It is smoothed by the HP filter proposed by Aaronson et al. (2016). Figure 2 shows the resulting non-agricultural employment gap and output gap, measured by the deviation between actual GDP and CBO’s actual potential GDP estimate.

Figure 2. Non-agricultural employment gap (%) and output gap (%)

Source: Self-calculation based on BLS, BEA and CBO data.

The employment gap in the second quarter of 2021 was -2.8% (-4.3 million jobs). In turn, we can conclude that there are still 4.3 million jobs in the labor market that are below full employment, of which about 2.5 million jobs come from the labor force participation rate below its potential level, and about 2.1 million jobs come from the unemployment rate. Higher than its natural level (Figure 3)). The remaining +300,000 deviation comes from overall and ratio contributions (Figure 3).

Figure 3. Breakdown of employment gap (million jobs)

Source: Self-calculation based on BLS, BEA and CBO data.

So when will this gap be narrowed? If it is assumed that the rate of job creation remains at 500,000 per month, this gap will narrow in the first quarter of 2022. This will correspond to the same level of non-agricultural employment as in the fourth quarter of 2019, the peak of the previous business cycle. Hope things will develop like this.

reference

Aaronson D., Brave SA, Kelly D., in 2016, is the labor market still weak? , Letter 359 from the Federal Reserve Bank of Chicago, Federal Reserve Bank of Chicago.

Aaronson D., Hu L., Seifoddini A., Sullivan DG, 2014, the labor force participation rate decline and its impact on unemployment and employment growth, Economic view, Federal Reserve Bank of Chicago, Vol. 38, fourth quarter, pp. 100-138.

Budget and Economic Outlook Update: 2021-2031, Congressional Budget Office, July 2021.


This article is written by Pavel Skripczynski.



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