Labor markets are getting close to maximum employment in many parts of the Cleveland Fed’s region, say Bank researchers
The Federal Reserve's “dual mandate” is price stability and maximum employment. But there are a number of challenges in determining when labor markets are at their maximum sustainable level, or “tight,” say Federal Reserve Bank of Cleveland researchers Mark Schweitzer and Christopher Vecchio. Cautioning against focusing on a single statistic, such as the unemployment rate, and using more inclusive measures of labor market tightness, the researchers find that labor markets are getting close to maximum employment in many parts of the Bank's region. (The region served by the Cleveland Fed includes Ohio, western Pennsylvania, eastern Kentucky, and the northern panhandle of West Virginia.)
Even when the economy is operating at its potential, there is some level of unemployment from the normal movement in and out of jobs. Comparing this “natural rate of unemployment” to reported unemployment rates can provide information about labor market tightness, say Schweitzer and Vecchio. One estimate, the most recent median projection of longer-run unemployment from Fed policymakers, suggests that the natural rate is 4.8 percent, close to the national unemployment rate of 5 percent at the end of 2015.
But regions have very distinct workforces and industries, which means that they vary in the level of unemployment rates they can sustain. To examine labor market progress within the region, Schweitzer and Vecchio compare current unemployment rates to the pre-recession levels of 2006, when the nation's unemployment rate was last near where many economists might define maximum employment. They find that, in 2015, unemployment rates in many counties in the Cleveland Fed's region are between 0 and 2 percentage points lower than their 2006 levels. “It's clear that many counties are seeing tighter labor market conditions then they've experienced in the last decade,” say the researchers.
Wage growth can also provide insights into labor market tightness. The researchers note that the broadest compensation measure, the Employment Cost Index (ECI), shows relatively little compensation growth during the last year—just 2 percent. “In past recoveries, ECI has been considerably higher, suggesting that today's labor market is not as tight as the unemployment rate alone would indicate,” say the researchers. While comparable compensation data is not available at the local level, the Cleveland Fed asked its regional contacts about their expected wage costs for new employees. “As of last December, of our contacts who were hiring, only about 18 percent reported that they were raising wages and/or salaries for most job categories; almost 50 percent reported making adjustments only to selected job categories; and roughly 30 percent reported no change in wages or salaries,” say the researchers.
For more details, see State of Employment: Are Fourth District Labor Markets Tight?
Federal Reserve Bank of Cleveland
The Federal Reserve Bank of Cleveland is one of 12 regional Reserve Banks that along with the Board of Governors in Washington DC comprise the Federal Reserve System. Part of the US central bank, the Cleveland Fed participates in the formulation of our nation’s monetary policy, supervises banking organizations, provides payment and other services to financial institutions and to the US Treasury, and performs many activities that support Federal Reserve operations System-wide. In addition, the Bank supports the well-being of communities across the Fourth Federal Reserve District through a wide array of research, outreach, and educational activities.
The Cleveland Fed, with branches in Cincinnati and Pittsburgh, serves an area that comprises Ohio, western Pennsylvania, eastern Kentucky, and the northern panhandle of West Virginia.
Doug Campbell, firstname.lastname@example.org, 513.455.4479