By Tim Shea
When it comes to measuring economic performance, a single, all-important truth defines most methodologies: capturing every little detail is a fool’s errand. There are simply too many nuances in real-world markets to fully understand them, too many variables in play to collect data on them all. Instead, economists try to simplify that complex system of variables into digestible chunks. We build models, we group businesses into industries and jobs into occupational codes, and we zero in on a few key metrics. These metrics are of particular importance as they paint the economy in broad strokes that the average American can understand. Perhaps the most important metric of them all, though, at least in the eyes of those average Americans, is the employment level.
It’s easy to understand why the employment level (as well as its ugly step-sibling the unemployment rate) have risen to such prominence. At its essence, the employment level represents the ability of ordinary Americans to find a good job and thus provide for themselves and their families. In economic parlance, this ideal balance within the labor market is known simply as “full employment.” But even that blunt term can cause confusion. For one thing, it doesn’t mean that everyone who wants a job has one, i.e. unemployment does not need to equal zero percent for there to be full employment.
To reconcile this seeming contradiction of terms, it is important to understand how employment and unemployment are calculated. Basically, the unemployment rate is the number of people actively looking for work divided by the total labor force. This methodology, while useful, also has a number of significant flaws that double as perpetual fodder for sniping political commenters. It doesn’t effectively measure underemployment, for one, nor does it capture those unemployed workers who got so discouraged they left the labor force altogether. On the other hand, these methodological shortcomings do go to show why an ideal unemployment rate would be greater than zero. Both previously discouraged workers reentering the labor force and underemployed workers leaving their job in search of greener pastures represent positive trends within the labor market, or the “good” type of unemployment.
There is also an extent to which full employment is a social question rather than an economic one. Consider Singapore, which boasts both a higher labor force participation rate and significantly lower unemployment than the U.S. In purely economic terms, it could be argued that their labor market performance is trouncing ours. But Singapore also lacks widespread minimum wage rules or other labor protections that most Americans consider essential. In this way, we can see how social equality can factor against pure economic efficiency in determining the “proper” level of full employment.
So how about it, are we at full employment?
It’s hard tellin’. The ultimate U.S. authority on the matter—Janet Yellen and her Federal Reserve Open Market Committee—are notoriously cagey about putting a concrete number out there, but they have strongly indicated that we are at or even below what they consider to be full employment. That’s not to say everything is perfect. Unemployment varies significantly across regions, and troubling differences between races and age groups likewise persist. But, when all is said and done, things are looking pretty good. At least for now.