November Labor-Market Update
US labor-market numbers for November 2023 are in. Labor-market tightness falls slightly to 1.4—still above its efficient value of 1. The efficient unemployment rate is at 4.4%.
The US labor-market numbers for November 2023 just came out. This post uses the latest numbers on vacant jobs and unemployed workers from the Bureau of Labor Statistics to compute three key statistics:
Labor-market tightness
Efficient unemployment rate
Unemployment gap
Overall, the US labor market cooled very slightly in September, but it remains inefficiently tight. The Beveridge curve shifted inwards somewhat, lowering the efficient unemployment rate to 4.4%.
New developments
The US labor-market statistics for November 2023 are as follows:
Unemployment rate: u = 3.7%. This is down from 3.9% in October.
Vacancy rate: v = 5.2%. This is down from 5.6% in October.
Labor-market tightness: v/u = 5.2/3.7 = 1.4. This is down from 1.5 in October.
Efficient unemployment rate: u* = √uv = √(0.037 × 0.052) = 4.4%. This is down from 4.7% in October.
Unemployment gap: u – u* = 0.037 – 0.044 = –0.7pp. The gap has shrunk from its width of -0.8pp in October.
Is the US labor market is too tight or too slack?
Since the vacancy rate is above the unemployment rate (5.2% > 3.7%), the US labor market remains inefficiently tight. This means that the labor market is above full employment: the labor market is so hot that an excessive amount of labor is devoted to recruiting and hiring instead of producing.1 In fact, the labor market has been inefficiently tight since May 2021, as illustrated below:
We can also see that the US labor market is inefficiently tight by looking at labor-market tightness v/u. Tightness is continuing its slow fall, but remains above unity (1.4 > 1):
How far is unemployment from its efficient rate?
Tightness remains above 1, so the labor market is still inefficiently tight. This means that the actual unemployment rate remains below the efficient unemployment rate. The graph below illustrates the construction of the efficient unemployment rate:
In October the efficient unemployment rate is 0.7 percentage point above the actual unemployment rate (u* = 4.4% while u = 3.7%). 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:
The efficient unemployment rate u* indicates the unemployment rate consistent with full employment. Since one of the mandates of the Federal Reserve is to maintain the economy at full employment, u* is a good target for the Fed. When the actual unemployment rate reaches u*, the Fed knows that it has satisfied its employment mandate. Currently unemployment is below u*, so the labor market needs to cool some more to reach full employment.
What is happening to the Beveridge curve?
The reason why the efficient unemployment rate fell slightly in October is that the Beveridge curve shifted slightly inward. The Beveridge curve shifted dramatically outward at the onset of the pandemic. Since April 2022, however, the Beveridge curve has been slowly shifting back inward to its pre-pandemic location. Historically, such shifts do not occur very often. But the curve is now well between its pre-pandemic and pandemic locations:
Background for readers just joining us: data
The number of unemployed workers is measured by the Current Population Survey (CPS). The CPS is a household survey conducted on the Sunday–Saturday week including the 12th of the month. The CPS also reports the number of labor-force participants.
The number of vacant jobs is measured by the Job Openings and Labor Turnover Survey (JOLTS). The JOLTS is a firm survey conducted on the last business day of the month. The JOLTS release is dated October 2023, but because vacancies are measured on the last business day of October, I assign them to November 2023.
The numbers from the CPS and JOLTS then give unemployment and vacancy rates:
Unemployment rate = # unemployed workers / # labor-force participants
Vacancy rate = # vacant jobs / # labor-force participants
Background for readers just joining us: methodology
The formula u* = √uv for the efficient unemployment rate is derived in a recent paper that Emmanuel Saez and I wrote. The paper shows that under simple but realistic assumptions, the efficient unemployment rate is the geometric average of the unemployment and vacancy rates—that is, u* = √uv.
An implication of this formula is that the labor market is efficient whenever there are as many unemployed workers as vacant jobs (u = v); inefficiently tight whenever there are fewer unemployed workers than vacant jobs (u < v); and inefficiently slack whenever there are more unemployed workers than vacant jobs (u > v). This criterion can also be formulated using labor-market tightness v/u.
More about u* and full employment
I recently gave a 15-minute presentation on the topics of u* and full employment.2 The occasion was a panel on measuring full employment in real time, at the Boston Fed’s research conference on rethinking full employment. The presentation might be of interest for anybody who wants to learn more about full employment and our paper on u* = √uv. The panel was moderated by Egon Zakrajsek of the Boston Fed. It included presentations by Jeffrey King from the CBO and Stefano Scarpetta from the OECD, and a lively discussion with the audience.
Note that this definition of efficiency and full employment has nothing to do with inflation: it is only about the appropriate allocation of resources on the labor market.
The slides from the presentation are available on my website.