The Mirage of ‘Full Employment’

Low unemployment rates mask soft spots in the job market, especially among rural Americans and minorities.

For the last several months, Republicans have been resting on the laurels of positive job growth and low unemployment — proof, they say, of the Trump economy’s strength. In March, the nation’s official jobless rate stood at 4.1 percent, the lowest it’s been since the peak of the Great Recession and a level that many economists say is at or approaching “full employment.”

Certainly on paper, the labor market looks to be nearly as tight as it was during past expansions, such as during the boom of the late 1990s and early 2000s. In reality, however, the low official unemployment rate masks some serious weaknesses in the economy, including in the parts of the country that are the strongholds of Trump’s support.

Rural job growth, for example, is lackluster in comparison to that of cities. And while college graduates and the highly-skilled are in demand, minorities and lesser-skilled workers are still struggling. The share of people actually participating in the labor market is also significantly lower than in the past, including among “prime-age” adults between the ages of 25 and 54 who are the backbone of the job market. Simply put, fewer Americans are working or even looking for jobs. This means the decline in jobless rates reflects to some extent a shrinking pool of Americans looking for work.

In March, for instance, the total share of Americans participating in the workforce was more than four percentage points lower than it was in February 2000 — the last time the unemployment rate was as low as it is today. The share of prime-age adults in the workforce was also down by more than two percentage points in comparison to 2000.

The decline in workforce participation is in fact the biggest challenge that must be solved if “full employment” will ever be truly achieved. What isn’t yet clear is exactly why this decline has happened and how to fix it.

While some analyses attribute the continuing decline in workforce participation to demographic shifts, such as the retirement of Baby Boomers and extended schooling for young adults, this doesn’t explain why so many prime-age workers are missing from the strongest job market in years. A 2014 analysis by the Council of Economic Advisers concluded that demographics explains only about half of the decline in workforce participation, while as-yet-unexplained “other factors” account for much of the rest.

There are, however, some strong clues about what these “other factors” could be, such as a geographic mismatch between where new jobs are being created and where people live; workers lacking the right skills for the jobs being created; and lingering structural discrimination. These factors are, in fact, evident from an analysis of who is missing out on the benefits of the recovery:

Rural Americans

Many rural Americans, for example, are facing far less rosy job prospects than their urban counterparts. The number of non-metro jobs still hasn’t caught up to pre-recession levels and even dropped in two of the last five years.

Rural areas are moreover suffering from a double whammy of higher-than-average unemployment rates and lower workforce participation. For instance, while the official rural jobless rate stood at 5.4 percent at the end of the second quarter in 2016 (compared to 4.8 percent for metro areas), the USDA estimates that the unemployment rate would have been 7.8 percent had workforce participation rates been the same as in 2010.

Cities, in contrast, are booming, as regional inequality continues to worsen. According to the Bureau of Labor Statistics, 313 of the nation’s 388 metro areas saw net gains in job growth over the last year. More than two dozen cities report official unemployment rates of less than 3 percent. The biggest winners are, predictably, places such as New York, Dallas and Los Angeles, each of which added 100,000 or more jobs in the last year.

Workers without higher education

Workers with the least skills are also failing to prosper in comparison to their better-educated counterparts. In March 2018, the unemployment rate among workers with a bachelor degree was just 2.2 percent, or about half the rate for workers with a high school diploma or less than a high school education. These figures, however, don’t fully convey the disparities in employment between the best- and least-educated workers.

Because the unemployment rate only includes those actively looking for jobs, a better gauge of the prevalence of work is the “employment-to-population ratio,” which also includes individuals not in the workforce. Under this measure, the inequality in work experience between highly educated and less-educated workers is much more stark.

As the following chart shows, just 44.1 percent of Americans without a high school diploma and 55.0 percent of high school graduates work, versus close to three-quarters of workers with a bachelor’s degree or better.

African American men

Another group that could and should be doing better is African-American men. In March 2018, the unemployment rate among black men was nearly double that of whites — 6.1 percent versus 3.3 percent.

Again, however, the true story is in the employment to population ratio, which shows that although both groups have seeing declining employment, lack of work is far more pervasive among African-American men and among prime-age men in particular. While 87.1 percent of prime-age white men were working in March, the equivalent figure among black prime-age men was nearly 10 percentage points lower, at 77.6 percent.

While the official numbers might say the nation is at “full employment,” there’s much more slack in the labor market than the official numbers night suggest. At the same time that some employers have begun to worry about unfilled job openings and upward pressure on wages, millions of Americans are missing out on new opportunities, either because they live in the wrong place or lack the right skills.

One potential result of this patchy recovery is a worsening of the already significant gulf between the economic haves and have-nots, especially if prosperous metro areas continue to grab the lion’s share of new jobs while vast swathes of the country lose out. These disparities in turn will only further inflame the social and political resentments now dividing the country while making it that much harder for the workers falling behind to catch up.

Although continued strong growth could eventually lift more boats, the workers most likely to benefit are the easiest to employ, with adequate access to jobs and enough basic skills to get through the door. The market alone won’t solve the mismatches in skills and geography that are acting as structural barriers to true full employment. Instead, it’s up to policymakers to make that happen.

Originally published at washingtonmonthly.com on April 13, 2018.