5 Reasons the Labor Market is Not as Tight as the Unemployment Rate Suggests

The official unemployment rate has fallen to 3.7%. Similarly, the expanded unemployment rate, which includes people marginally attached to the labor force and those who want full-time work but can only find part-time jobs, is now 7.5%. Both unemployment measures are well below pre-recession levels, and the official unemployment rate is the lowest it’s been in 49 years. What’s more, the number of job openings exceeds the number of job seekers, a pattern which has been historically rare. Those are all signs of a very tight labor market.

And yet, employers don’t appear to be doing what they would if they truly had to fight over a shrinking pool of candidates—namely raise wages and benefits, or boost the use of bonuses. Wage growth is sluggish, and bonuses are only a slightly higher percentage of compensation than in previous years. Here are five reasons there may be hidden slack in the labor market.

Source: Current Population Survey (conducted by the United States Census Bureau for the Bureau of Labor Statistics (BLS).

1. Large Parts of the Country Still Have Staggeringly High Unemployment Rates

One reliable fact about the United States is that any average statistic will belie dramatic regional variation. It’s not as though the whole country has a 3.7% unemployment rate—far from it. At one extreme, unemployment is just 1.7% in the college city of Ames in central Iowa, and 2.1% in Honolulu County, Hawaii. These places show us just how low unemployment can go.

At the other extreme, unemployment is a staggering 22.0% in the border city of Yuma, Arizona, and 20.3% in the agricultural border city of El Centro, California. Similarly, most American Indian reservations are “islands of poverty in a sea of wealth,” to quote author Terry Anderson. For example, the average unemployment rate in tribal areas in Arizona is 21.6 percent, and in some reservations, it is higher than 60%.

The result is a highly uneven labor market, characterized by labor shortages in some occupations and areas, but massive over-supplies of job seekers in others. While there are many opportunities for workers in manufacturing, construction, and transportation, for example, there are other occupations where huge numbers of candidates are competing over scarce jobs. Over the past year on ZipRecruiter, there were roughly 38,000 jobs for receptionists and over 3.6 million applications. That’s almost 100 responses per job. The picture is similar for warehouse personnel, such as pickers, stockers, and forklift drivers. There were roughly 72,000 jobs for warehouse workers and 6 million responses.

Plunging disability insurance applications, food stamp enrollment, and unemployment insurance claims suggest that labor market slack is slowly being absorbed. But there is still a long way to go. In large parts of the country, huge pools of less-educated unemployed workers—typically minorities and immigrants—have yet to be absorbed into full, productive employment.

2. Labor Force Participation Is Still Relatively Low

At 62.7%, the civilian labor force participation rate is still well below its pre-recession level of around 66%, and its 2000 peak of 67.3%. Similarly, the 60.4% employment-to-population rate is well below its 2000 peak of 64.7%. And this is not just because of an aging population and retiring baby boomers. Fewer prime-age Americans are working or looking for work. And the drop-off has been particularly sharp for people with less education. What’s more, female labor force participation has declined since 2000 in the U.S., while doing the opposite in most OECD countries.  

Source: Current Population Survey conducted by the United States Census Bureau for the Bureau of Labor Statistics (BLS)

In other words, there is still considerable room to increase U.S. labor force participation. Fortunately, there are signs that attractive job market opportunities are luring some back into the labor force. Prime-age labor force participation has recovered from a low of 80.6% in 2015 to 81.8% today. Just in the past two years, the number of employed people in the U.S. grew by more than 4 million, according to the Current Population Survey. In some recent months, people have reentered the workforce more quickly than they could be employed, putting downward pressure on wages.

3. Currently-Employed Workers Are Seeking Better Opportunities

Workers are increasingly willing to quit their jobs, which suggests they are confident they will find better ones. On the one hand, this can cause employers to raise wages in order to retain and attract the best talent. On the other hand, however, it can increase the number of applications some employers are receiving and make wage increases less necessary as a recruitment tool.

During the Great Recession, many people were forced to take jobs that did not match their skills or preferences, or that did not suit their lifestyles. According to the American Working Conditions Survey, most workers are well matched to their working conditions, but there are key attributes—especially long hours, work intensity, and exposure to physical hazards—for which there is an important degree of mismatch. Workers without a college degree are less satisfied with their working conditions than college graduates, and the education gap is most pronounced among men.

Now that the labor market is improving, many people are seeking to quit their current jobs in search of more favorable working conditions, a greater sense of meaning and purpose at work, better hours, or shorter commutes. They are not necessarily looking for higher wages, as we found in a recent ZipRecruiter survey of job seekers.

4. Retirees Are Unretiring

The social norm of retiring at 62 or 65 is still a strong one, even though many elderly Americans are mentally and physically fit to work, and the number of Americans living past 90 nearly tripled between the 1980 and 2010 Census reports. Many Americans who do try retirement, however, are later changing their minds, unretiring, and going back to work. A 2010 analysis by Nicole Maestas, an economist at Harvard Medical School, found that more than a quarter of retirees later went back to work. A more recent RAND Corporation study found that 39% of workers 65 and older who were currently employed had previously retired at some point and then reentered the workforce. The study also found that more than half of those 50 and older who are not in the labor force say they would work in the future if the right opportunity came along.

Why do older Americans want to go back to work? It’s not primarily because they don’t have enough retirement savings or need to cover medical expenses, the survey found, but rather because they seek a sense of purpose and an opportunity to engage their minds. As the number of job openings increases, attractive opportunities are drawing older Americans back to work. One advantage older job seekers have over their younger counterparts is that they have often accumulated a range of useful work experiences and skills. Another is that they are less likely to rate formal benefits—such as dental insurance, life insurance, or paid time off—as essential or very important, partly because many have access to Medicare and Social Security. So reentering retirees can sometimes be both attractive to employers and less expensive.

5. The Labor Market Is Global

One final reason there is slack in the labor market is that the market is essentially unbounded. While there is considerable anecdotal evidence that many employers are raising wages, adding benefits, expanding bonuses, investing in skills training, and scouring the countryside (or the nearest inner city and American Indian reservation) for workers, many employers have other options. Namely, employers can attract workers from abroad and seek more H-1B and H-2B immigrant visas, or they can move production offshore. The fact that job openings outnumber job seekers in the U.S. may not have that much significance in an increasingly global economy, where job seekers in the U.S. are not the only ones competing for opportunities.  

Economists broadly agree that immigration and offshoring have had huge net benefits. There is substantial evidence, for example, that offshoring may lead to more overall employment growth in the U.S. parent company, rather than less—and, of course, cheaper goods for consumers. But the same studies typically find a tradeoff—some degree of underlying job loss and reallocation of workers, particularly for those with less education and training.

The Key Takeaway

Ultimately, there are still around 6 million unemployed people in the U.S., and roughly 50 million working-age people who are not in the labor force, many of whom express an interest in returning to work under the right conditions. The most recent Bureau of Labor Statistics jobs report showed a disappointing 263,000 increase in the number of workers who want full-time work, but can only find part-time jobs. Low geographic mobility and other search frictions make the job market artificially tight in some places. But by many measures, there is still considerable hidden slack.

People will be absorbed into the labor force most quickly in occupations with low barriers to entry and low skill requirements, that are nevertheless relatively pleasant and safe—such as many receptionist, administrative assistant, and warehouse worker jobs. Due to the oversupply of workers in these fields, they will see little wage growth, even as compensation rises in other parts of the economy.

Meanwhile, wage growth will be concentrated in parts of the economy with the least slack—such as in occupations with high skill requirements, or long hours and dangerous conditions, where there are very few applicants per job. For many Americans, however, gaining new skills, accepting demanding working conditions, or moving to another town may simply be too much of a sacrifice—even if they are the paths to higher wages.

Julia Pollak

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Julia Pollak is a labor economist at ZipRecruiter. She provides insights and analysis on current labor market trends and the future of work.

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