August 12, 2021
Current US Unemployment Rate Could Reset Baselines
Every week, Flexport Chief Economist Phil Levy offers a quick analysis of relevant public data for the global trade community.
See what the latest indices reveal and keep up with the facts and figures that could impact your business.
Here’s the chart for the week of August 9, 2021.
This week, it's the US Unemployment Rate.
The employment report for July 2021 was unusually strong. The economy added 943K new jobs and the unemployment rate fell from 5.9% to 5.4%.
The question is whether this leaves the labor market fully recovered, well on the way to recovery, or with far to go. In particular, this is the question before the Federal Reserve Board, which has a dual mandate to seek price stability (low inflation) and maximum sustainable employment (low unemployment).
At the moment, even amidst signs of inflation, Federal Reserve officials have been vowing to maintain very low interest rates and quantitative easing because they said there was still a substantial way to go on employment. How did the latest jobs report alter this assessment?
We can focus here on the unemployment rate, perhaps the best-known measure of how the labor market is doing.
The graph shows how the rate has behaved monthly for the last 50 years, from the start of 1971. The red horizontal line shows the July 2021 number for easy comparison. The easiest comparison, and the one often made by officials favoring loose policy, is to the levels on the eve of the pandemic, when the unemployment rate was 3.5%, substantially below the current level. Similarly, nonfarm payroll employment was 5.7m jobs higher in February 2020.
The Fed is also transparent about what it’s looking for. The median projection for the unemployment rate is 4.5% in 2021, 3.8% in 2022, 3.5% in 2023, then 4.0% in the longer run. Relative to these numbers, there’s still ample work to be done (though monetary policy works with a lag).
The chart shows that a 5.4% unemployment rate looks pretty good historically. Over this time period, the monthly rate was 5.4% or lower only 35.7% of the time. It was at or below 4.5% for 13.7% of the months tallied. It was at or below 4.0% just 5.9% of months.
Economists frequently talk about the “natural rate” of unemployment—that rate below which inflation would start to pick up. The idea is that there is a certain amount of employment that came with changing jobs or moving around. If that gets too low, wages will be bid up, sparking inflation.
The pre-Covid coexistence of 3.5% unemployment and low inflation led some to think that the natural rate was at least that low. But economists have never been very sure where that threshold was, and there have been a number of significant changes in the way workers have behaved during the pandemic. The July report moves us closer to testing where the new threshold lies.