May Labor-Market Update
US labor-market continues cooling in May 2024, and is almost back to full employment.
Main message: US labor-market continues cooling in May 2024, and while it remains inefficiently tight, it is almost back to full employment. The Beveridge curve is also almost back to its pre-pandemic position.
The US labor-market data for May 2024 just came out. This post uses the latest numbers on vacant jobs and unemployed workers from the Bureau of Labor Statistics to compute labor-market tightness, full-employment rate of unemployment (FERU), and unemployment gap.
New developments
The US labor-market statistics for May 2024 are as follows:
Unemployment rate: u = 4.0%. This is up from 3.9% in April.
Vacancy rate: v = 4.8%. This is down from 5.1% in April.
Labor-market tightness: v/u = 4.8/4.0 = 1.2. This is down from 1.3 in April.
FERU: u* = √uv = √(0.040 × 0.048) = 4.4%. This is the same as in April.
Unemployment gap: u – u* = 0.040 – 0.044 = –0.4pp. The gap shrunk from –0.05pp in April.
Background for readers just joining us
The FERU formula u* = √uv is derived in a newly revised paper with Emmanuel Saez. The formula implies that the labor market is at full employment when there are as many unemployed workers as vacant jobs (u = v); inefficiently tight when there are fewer unemployed workers than vacant jobs (u < v); and inefficiently slack when there are more unemployed workers than vacant jobs (u > v).
In the newly revised version, which we posted on arXiv this week, we extend our previous analysis to the end of 2023. We find that between 1930 and 2023, the FERU is stable and averages 4.1%:
The graph above also shows how exceptional the increase in the FERU at the beginning of the pandemic was. The pandemic was the first time in the past century that the FERU crossed 6%.
We also find that the FERU is generally lower than the actual rate of unemployment, so the US economy is generally too slack. The gap between the unemployment rate and the FERU is especially large in recessions. So the US economy has generally fallen short of full employment in the past century:
We have also added a few robustness checks to the paper. In particular, we compute the FERU if the unemployment rate is measured not only by U3 (standard unemployment rate), but also by U4 (U3 + discouraged workers), and U5 (U4 + other marginally attached workers). The differences are small, however:
The FERU formula u* = √uv is obtained under some simplifying assumptions. These can be relaxed to obtain a generalized formula involving social cost of unemployment, recruiting cost, and elasticity of the Beveridge curve. Quantitatively, however, the two formulas are close:
By extending the data to the end of 2023, it becomes even clearer how tight the post-pandemic labor market has been. The last time it was so tight was 1945—80 years ago! Given this and the behavior of inflation, it is odd that the Fed did not start tightening in 2021Q2 but waited until 2022Q2.
Is the US labor market too tight or too slack now?
Going back to the May 2024 situation, we see that since the vacancy rate is above the unemployment rate (4.8% > 4.0%), the US labor market remains inefficiently tight. This means that the labor market is beyond full employment: the labor market is so hot that an excessive amount of labor is devoted to recruiting and hiring instead of producing. The labor market has been inefficiently tight since May 2021:
We can also see that the US labor market is inefficiently tight by looking at labor-market tightness v/u. Tightness remains above unity (1.2 > 1), which signals that the labor market is inefficiently hot:
How far is unemployment from the FERU?
Since the labor market is inefficiently tight, the actual unemployment rate remains below the FERU. The graph below illustrates the construction of the FERU:
The FERU is 0.4 percentage point above the actual unemployment rate (u = 4.0%, u* = 4.4%). This negative unemployment gap is another manifestation of an inefficiently tight labor market. Below is the evolution of the unemployment gap over the course of the pandemic. The unemployment gap has been negative (u* > u) since the middle of 2021:
How is the Beveridge curve moving?
After shifting out dramatically during the pandemic, the Beveridge curve is slowly shifting back inward. It is now almost back to its pre-pandemic position. Although the Beveridge curve remains somewhat further outward, the pre-pandemic and post-pandemic branches of the curve now overlap—for the first time this month!
