There might not be as much as slack in the labour market as some think.
A commonly cited measure — the employment-to-population ratio (EPOP) — has indicated that the labour market still has resources which aren’t being used.
This measure showed that as of August, less than 60% of the population is working.
But in a post on Tuesday economists at the Atlanta Fed argue that this measure is overstating slack due because utilization is considered employment, regardless of demographic or other shifts that may have happened in the economy. Said another way, the EPOP is merely the number of workers divided by the number of people.
And so the Atlanta Fed’s John Robertson and Ellyn Terry think a more accurate picture of the labour force can be gleaned by taking those that don’t want to work at face value rather than counting these folks as being out of the labour force altogether as part of a gross calculation.
By this method, the groups being left behind include only those who want work and are either unemployed, not in the labour force but want a job, or are employed only part-time but want full time work.
Robertson and Terry define this as the utilization-to-population ratio, or ZPOP, and this measure shows that only 9% of people who don’t want to work are either unemployed or inadequately employed.
They write, “The headline U-3 unemployment rate is very close to its pre-recession level but is thought to overstate the health of the labour market. At the same time, we think that the EPOP ratio overstates the amount of remaining labour market slack. The ZPOP ratio is in the middle; approaching its prerecession level but still with some way to go.”
And so we’re not all the way back, but closer than some sceptics might think.
Here’s the ZPOP showing utilization coming almost all the way back.
And the improvement of the ZPOP over the EPOP since the recession.
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