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BPEA Article

How tight is the US labor market?

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Editor's Note:

This paper is part of the Spring 2020 edition of the Brookings Papers on Economic Activity, the leading conference series and journal in economics for timely, cutting-edge research about real-world policy issues. Research findings are presented in a clear and accessible style to maximize their impact on economic understanding and policymaking. The editors are Brookings Nonresident Senior Fellow and Northwestern University Professor of Economics Janice Eberly and Brookings Nonresident Senior Fellow and Harvard University Professor of Economics James Stock. Read summaries of all five papers from the journal here.

The number of jobs employers are trying to fill is higher relative to the number of unemployed people than at any time in the last quarter century, yet both wages and prices have been surprisingly stable.  One reason for that surprising disconnect might be that this standard metric overstates the tightness of the labor market, according to a paper to be discussed at the Brookings Papers on Economic Activity conference on March 19.

Katharine Abraham

Director - Maryland Center for Economics and Policy

Professor, Survey Methodology and Economics - University of Maryland

Chair - Commission on Evidence-Based Policymaking

John Haltiwanger

Dudley and Louisa Dillard Professor of Economics and Distinguished University Professor of Economics - University of Maryland

A more comprehensive measure of labor market tightness constructed by the paper’s authors—Katharine G. Abraham, John C. Haltiwanger, and Lea E. Rendell of the University of Maryland—shows that recent labor market conditions are not extraordinarily tight.

Traditionally, economists have gauged labor market tightness by comparing the number of job openings with the number of unemployed people.  In a recession, job openings become scarce and the ranks of the unemployed swell.  From employers’ perspective, the labor market is loose—it’s easy to hire well-qualified employees.  In a boom, the opposite is true.  There are more job openings and fewer unemployed people, so the labor market is tight.

A more comprehensive measure of labor market tightness…shows that recent labor market conditions are not extraordinarily tight.

“The traditional view of where employers can find workers, however, leaves out some important things,” Professor Abraham said in an interview with Brookings.  “It only considers the unemployed.  But an awful lot of jobs are filled by people who are out of the labor force or who are changing jobs.”

Using data from 1994 through the end of last year, the authors constructed a measure of “effective job searchers” that accounts for the unemployed; people out of the labor force, meaning they don’t have a job and haven’t actively looked for one during the previous four weeks; and employed people looking to change jobs.

“The unemployed are only about 30 percent of effective searchers,” the three authors  find.

The traditional vacancies-to-unemployment ratio also doesn’t consider that at times (downturns) firms don’t push as intensively to recruit new employees as at other times (booms).  The authors built a measure of effective vacancies that takes this variation in recruiting intensity into account and then looked at how the number of effective vacancies compared to the number of effective job searchers.

Traditional vs. adjusted labor market tightness

While the traditional vacancy-to-unemployment ratio shows labor market conditions to be far tighter than at any time over the 1994-2019 period studied, the authors’ more complete measure tells a different story.

“Basically, we’re more or less where we were in the late 1990s.  It’s a good time to be a job seeker, clearly, but we’re not up against the constraints depicted by the traditional measure,” Professor Haltiwanger said in an interview.

That suggests, according to Abraham and Haltiwanger, that monetary policymakers at the Federal Reserve have less reason to worry that the labor market is too tight.

David Skidmore authored the summary language for this paper. Becca Portman assisted with data visualization.

Citation

Abraham, Katharine, John Haltiwanger, and Lea Rendell. 2020. “How tight is the U.S. labor market?” BPEA Conference Draft, Spring.

Conflict of Interest Disclosure

Katharine Abraham is the Director of the Maryland Center for Economics and Policy and a Professor of Survey Methodology and Economics at the University of Maryland; John Haltiwanger is the Dudley and Louisa Dillard Professor of Economics and Distinguished University Professor of Economics at the University of Maryland; Lea Rendell is a graduate student in economics at the University of Maryland. Beyond these affiliations, the authors did not receive financial support from any firm or person for this paper or from any firm or person with a financial or political interest in this paper. They are currently not officers, directors, or board members of any organization with an interest in this paper. No outside party had the right to review this paper before circulation. The views expressed in this paper are those of the authors, and do not necessarily reflect those of the Maryland Center for Economics or the University of Maryland.

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