With unemployment at a 50-year low, you might think the tight labor market would be causing marked increases in wages. That’s not happening, and two UMD economists offer a new theory why: The job market is not quite as strong as the unemployment rate suggests.
A major limitation of the current rate’s methodology, said Professor Katherine Abraham and Professor John Haltiwanger, is that it takes into account only people without jobs who want to work, who are available immediately to work and who have actively searched for work during the past four weeks.
But to assess the true tightness of the labor market, they said, it’s also important to factor in available job openings and how aggressively employers are moving to fill them. In a paper presented earlier this month at a Federal Reserve System conference, they proposed a new metric calculated as the ratio of effective job vacancies to effective job searchers, where the latter takes into account not just those who meet the current requirements to be counted as unemployed, but everyone who might potentially fill an employer’s vacant job.
Based on that metric, Abraham and Haltiwanger said, the current job market looks similar to that of late 2000 or early 2001.
“In contrast to what the current unemployment rate would suggest, we don’t have to reach all the way back to the late 1960s to find a comparatively tight market,” said Abraham.
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