FacebookTwitterGoogle+RedditEmail

Taking Issue with Paul Krugman: We’re Still Not at Full Employment

I have to disagree with Paul Krugman on his assessment of the current state of the economy. While I would agree with most of his comments about the state of the stock market and housing market, and also the competence of the Trump administration, I think he is wrong in saying that we are at or near full employment.

There are a few points to be made here. First. Krugman rightly notes the aging of the population pushing down the overall labor force participation rates. However, employment to population rates for prime age workers (ages 25 to 54) are still below pre-recession levels and well below 2000 levels. The falloff is pretty much across the board, applying to both men and women and both more educated and less educated workers (not all by the same amount) suggesting that a supply side explanation is not likely. In other words, there is reason to believe that if there were more demand, more people would be working.

While the 4.1 percent unemployment rate is low by the standards of the last 45 years, it is worth noting that other major economies (e.g. Japan and Germany) now have far lower unemployment rates than almost any economist thought plausible just four or five years ago. I don’t see any reason to believe that the U.S. unemployment rate can’t fall to 3.5 percent, and possibly even lower, without kicking off an inflationary spiral.

As evidence in the other direction Krugman cites the quit rate, the percentage of workers who quit their job. He notes that this is almost back at pre-recession levels and not much below 2001 levels (the first year for which data are available). While this is true, much of the story here is a composition effect. A much smaller segment of the labor force is in sectors with low quit rates like manufacturing and the government. A larger share are in high quit rate sectors like restaurants and professional and business services.

If we look within sectors, the story is not quite so positive. In retail trade the quit rate has averaged just under 2.9 percent in the last half year. By comparison it was at 3.4 percent in the peak months in 2006 and reached 3.8 percent in 2001. These are not small differences. Even in the worst months of the Great Recession the quit rate was 1.9 percent in retail.

There is a similar story in the hotel and restaurant sector. The quit rate has averaged 4.3 percent over the last six months. It was 5.2 percent in the first six months of 2006 and 5.4 percent in the first six months of 2001. These lower quit rates indicate that we still have some way to go before workers feel confident about their labor market prospects.

Another measure that gives us a similar picture is the percent of unemployment due to people who voluntarily quit their job. This is a good measure since these are people who feel sufficiently confident of their labor market prospects that they are prepared to quit even before they have another job lined up.

This figure has averaged just 11.0 percent over the last three months. By contrast, it averaged more than 12.0 percent in the peak months of 2006 and more than 14.0 percent in the peak three months of 2000.

These figures give us good reason to believe that the labor markets can get considerably tighter before we start to see serious problems with inflation. This is an important issue because if we allow the Fed to crack down when there is still room for the economy to expand further we could be needlessly keeping millions of people from getting job and tens of millions from getting pay increases.

There undoubtedly is a point where the economy would be seeing too much demand and suffering from serious inflationary pressures, but we are likely still a considerable distance from this point.

This column originally appeared on CEPR.

More articles by:

Dean Baker is a macroeconomist and co-director of the Center for Economic and Policy Research in Washington, DC. He previously worked as a senior economist at the Economic Policy Institute and an assistant professor at Bucknell University.

July 17, 2018
Conn Hallinan
Trump & The Big Bad Bugs
Robert Hunziker
Trump Kills Science, Nature Strikes Back
John Grant
The Politics of Cruelty
Kenneth Surin
Calculated Buffoonery: Trump in the UK
Binoy Kampmark
Helsinki Theatrics: Trump Meets Putin
Patrick Bond
BRICS From Above, Seen Critically From Below
Jim Kavanagh
Fighting Fake Stories: The New Yorker, Israel and Obama
Daniel Falcone
Chomsky on the Trump NATO Ruse
W. T. Whitney
Oil Underground in Neuquén, Argentina – and a New US Military Base There
Doug Rawlings
Ken Burns’ “The Vietnam War” was Nominated for an Emmy, Does It Deserve It?
Rajan Menon
The United States of Inequality
Thomas Knapp
Have Mueller and Rosenstein Finally Gone Too Far?
Cesar Chelala
An Insatiable Salesman
Dean Baker
Truth, Trump and the Washington Post
Mel Gurtov
Human Rights Trumped
Binoy Kampmark
Putin’s Football Gambit: How the World Cup Paid Off
July 16, 2018
Sheldon Richman
Trump Turns to Gaza as Middle East Deal of the Century Collapses
Charles Pierson
Kirstjen Nielsen Just Wants to Protect You
Brett Wilkins
The Lydda Death March and the Israeli State of Denial
Patrick Cockburn
Trump Knows That the US Can Exercise More Power in a UK Weakened by Brexit
Robert Fisk
The Fisherman of Sarajevo Told Tales Past Wars and Wars to Come
Gary Leupp
When Did Russia Become an Adversary?
Uri Avnery
“Not Enough!”
Dave Lindorff
Undermining Trump-Putin Summit Means Promoting War
Manuel E. Yepe
World Trade War Has Begun
Binoy Kampmark
Trump Stomps Britain
Wim Laven
The Best Deals are the Deals that Develop Peace
Kary Love
Can We Learn from Heinrich Himmler’s Daughter? Should We?
Jeffrey St. Clair
Franklin Lamb, Requiescat in Pace
Weekend Edition
July 13, 2018
Friday - Sunday
Brian Cloughley
Lessons That Should Have Been Learned From NATO’s Destruction of Libya
Paul Street
Time to Stop Playing “Simon Says” with James Madison and Alexander Hamilton
Jeffrey St. Clair
Roaming Charges: In the Land of Formula and Honey
Aidan O'Brien
Ireland’s Intellectuals Bow to the Queen of Chaos 
Michael Collins
The Affirmative Action Silo
Andrew Levine
Tipping Points
Geoff Dutton
Fair and Balanced Opinion at the New York Times
Ajamu Baraka
Cultural and Ideological Struggle in the US: a Final Comment on Ocasio-Cortez
David Rosen
The New McCarthyism: Is the Electric Chair Next for the Left?
Ken Levy
The McConnell Rule: Nasty, Brutish, and Unconstitutional
George Wuerthner
The Awful Truth About the Hammonds
Robert Fisk
Will Those Killed by NATO 19 Years Ago in Serbia Ever Get Justice?
Robert Hunziker
Three Climatic Monsters with Asteroid Impact
Ramzy Baroud
Europe’s Iron Curtain: The Refugee Crisis is about to Worsen
Nick Pemberton
A Letter For Scarlett JoManDaughter
Marilyn Garson
Netanyahu’s War on Transcendence 
FacebookTwitterGoogle+RedditEmail