November Labor-Market Update

US labor-market conditions barely changed between October and November. The labor market is in the vicinity of full employment, with a recession probability of 28%.

Main message: US labor-market conditions barely changed between October and November.The US labor market is extremely close to full employment, with a labor-market tightness of 1.08 and an unemployment gap of -0.2pp. The current FERU is 4.4%. The current recession probability is 28%.

The US labor-market data for November 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), unemployment gap, and recession probability.

New developments

The US labor-market statistics for November 2024 are as follows:

• Unemployment rate: u = 4.2%. This is up from 4.1% in October.

• Vacancy rate: v = 4.6%. This is up from 4.4% in October.

• Labor-market tightness: v/u = 4.6/4.2 = 1.08. This is up from 1.06 in October.

• FERU: u* = √uv = √(0.042 × 0.046) = 4.4%. This is up from 4.3% in October.

• Unemployment gap: u – u* = 0.042 - 0.044 = –0.2pp. The gap widened from -0.1pp in October.

• Recession indicator = 0.44pp. This is up from 0.43pp in October.

• Recession probability = (0.44-0.3)/(0.8-0.3) = 28%. This is up from 26% in October.

Background for readers just joining us

The FERU formula u* = √uv is derived in a paper with Emmanuel Saez that will come out in the Fall 2024 issue of the Brookings Papers on Economic Activity. 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). Data and code for the paper are available on GitHub.

The recession indicator and recession probability are developed in another paper with Emmanuel. The recession indicator combines data on job vacancies and unemployment. The indicator is the minimum of the Sahm indicator—the difference between the 3-month trailing average of the unemployment rate and its minimum over the past 12 months—and a similar indicator constructed with the vacancy rate—the difference between the 3-month trailing average of the vacancy rate and its maximum over the past 12 months. When the indicator reaches 0.3pp, a recession may have started; when the indicator reaches 0.8pp, a recession has started for sure. The data and code used in the paper are also available on GitHub.

Is the US labor market inefficiently tight or slack now?

Coming back to the November 2024 situation, we see that the vacancy rate is above the unemployment rate (4.6% > 4.2%), so the US labor market remains inefficiently tight. The labor market has been inefficiently tight since May 2021. However, the US labor market is now very near full employment, as the unemployment and vacancy rates are very near each other:

We can also see that the US labor market is inefficiently tight but close to full employment by looking at labor-market tightness v/u. Tightness remains above unity but close to it (1.08 > 1), which signals that the labor market is inefficiently hot but not far from full employment:

Labor-market tightness has now fallen below its pre-pandemic level (it hovered around 1.2 in 2019 and early 2020). So the post-pandemic overheating seems to have dissipated.

How far is unemployment from the FERU?

Since the labor market is inefficiently tight, the actual unemployment rate remains below the FERU. But the unemployment rate and FERU are getting very close. The graph below illustrates the construction of the FERU, which is the geometric average of the unemployment and vacancy rates:

The FERU is 0.2 percentage point above the actual unemployment rate. 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, but it is nor almost 0—indicating a return to full employment:

Given how much the labor market has cooled, have we entered a recession?

To determine whether the economy has entered a recession, we build a new indicator. This indicator is the minimum of the Sahm indicator, which built from the unemployment rate, and a similar indicator built from the vacancy rate.

Below is the standard Sahm indicator (black line) and the threshold of 0.5pp that is used in the Sahm rule. The Sahm indicator is the difference between the 3-month trailing average of the unemployment rate (plotted above) and its minimum over the past 12 months. The Sahm rule says that a recession might have started whenever the unemployment indicator crosses the threshold of 0.5pp. The Sahm rule was triggered in August (the indicator reached 0.54pp > 0.5pp), but it was untriggered in the past 3 months (the indicator is now 0.44pp < 0.5pp). So the message from the Sahm rule is muddled:

We can construct the same type of indicator with the vacancy rate (orange line above). Indeed, job vacancies start falling quickly at the onset of recessions, when unemployment starts rising. Requiring that both unemployment and vacancies rise gives a more accurate and—maybe counterintuitively—more rapid recession signal. Here is the indicator that we build as the minimum of the unemployment and vacancy indicators:

Because this minimum indicator is less noisy than either the unemployment or the vacancy indicator, we can lower the recession threshold from 0.5pp to 0.3pp and detect recessions faster. On average between 1960 and 2022, our new recession rule, based on the minimum indicator, detects US recessions 0.8 month after they have started, while the Sahm rule detects them 2.1 months after their start.

Our minimum indicator reached 0.3pp between March and April 2024, so the recession might have started then. The current value of the minimum indicator is 0.44pp, so well above the recession threshold of 0.3pp.

What is the probability that we are now in recession?

A one-sided recession rule such as the Sahm rule tells us whether a recession might have started. To know what is the likelihood that a recession has started, we propose a two-sided recession rule.

The bottom threshold is the lowest value that generates no false positives over 1960–2022. A false positive is when the rule predicts a recession that does not materialize. This bottom threshold is 0.3pp.

The top threshold is the highest value that generates no false negatives over 1960–2022. A false negative is when the rule does not catch an actual recession. This top threshold is 0.8pp.

The rule says the following. When the minimum indicator is below 0.3pp, we cannot say that a recession has started. When the minimum indicator is between 0.3pp and 0.8pp, the recession might have started. And when the minimum indicator is above 0.8pp, the recession has started for sure. The two-sided rule operates as follows:

With November 2024 data, the minimum indicator is at 0.44pp, so the probability that the US economy is now in recession is (0.44-0.3)/(0.8-0.3) = 28%. This probability captures the fact that we do not know exactly what is the true threshold between a recession and a non-recession. From historical data, we learn that the true threshold is somewhere between 0.3pp and 0.8pp. This is because any threshold between 0.3pp and 0.8pp produces no false positives and no false negatives, so it perfectly separates recessions from non-recessions. The recession probability captures the share of the threshold range that has been covered:

What are the implications of full employment for inflation?

In a paper that we revised last month, Emmanuel and I study the connection between the unemployment gap plotted above and inflation. In the United States, in the past decades, it does seem that the divine coincidence holds: inflation is at its target level of 2% whenever the labor market is at full employment—whenever the unemployment rate is at the FERU. Based on this evidence, and the fact that the labor market is now in the vicinity of full employment, we can expect inflation to settle around 2%.

It might seem surprising that the divine coincidence holds in reality, but in the paper we show that the divine coincidence arises naturally in a Beveridgean (not New Keynesian) model of the Phillips curve. In that model, price dynamics are driven by slack instead of marginal costs: sellers raise prices when a lot of customers demand their goods and services, and they cut prices when demand falls. In such a world—which does not seem so unrealistic—the divine coincidence holds! Monetary policy is greatly simplified in that case because the Fed’s two mandates—stable prices and full employment—coincide.