Job openings hit a new record high in April, jobless claims are at historically low levels, and businesses indicate that labor shortages are becoming more widespread. As the Fed prepares to make a decision on rates at the 14 June FOMC meeting, an important question for them is: how much slack is left? In my experience the best way to answer that question is to look at employment ratios, i.e., the percentage of the population that is employed. Otherwise it's easy to get stuck in an endless debate over how to divide the non-working population into unemployed, discouraged workers, and people out of the labor force. With employment ratios, people are either working or they're not. By comparing the current employment ratio with its historical levels, we can get some idea if people are working more or less than in the past.
Comparing current employment ratios (by age and gender) with those from April 2006, around the peak before the global financial crisis hit, shows how much employment would rise if the employment ratio increased to where it was in April 2006, although in cases where the employment ratio is higher now than it was then, I use zero. Using this method, we calculate that employment could potentially rise by 2.6 million. There are currently more than 153 million employed persons in the US, so this would represent an increase of 1.7%. That's nothing to sneeze at, but it's not enough to make a huge difference to economic growth. Around half of that "slack" is represented by younger men, a segment of the population for which the employment ratio has been trending lower for decades.
It therefore seems fair to say that much of the damage caused by the global financial crisis has been repaired, and there really isn't much slack left in the labor market. We expect the Fed to reach a similar conclusion and hike rates by 25 basis points on the 14th.
