Striving for Full Employment in America

Full employment means that unemployment has fallen to the lowest possible level without provoking inflation.

On February 5, “Fortune” magazine declared that the U.S. was at “full employment.” In round numbers, that would equate to an unemployment rate of less than 5 percent, with a labor participation rate above 64 percent. While not every economist is in complete agreement with the magazine, there is significant evidence that labor market is drying up for employers who need to add employees, replace employees who are retiring or leaving for new job opportunities.  

Full employment is a term economists use to signify an economy that is considered to be in balance: where there is no longer cyclical economic weakness, but also no pressures pushing the inflation rate higher. To be clear, the term doesn’t signify an economy in which everyone who is of working age and able-bodied has a job, nor does it imply that employees feel they have a good job or a job they feel lives up to their skill set. Essentially, full employment means that unemployment has fallen to the lowest possible level without provoking inflation.

An increase of interest rates by the Federal Reserve could be coming in the near future, which is a byproduct of full employment. As the labor market tightens, the Federal Reserve is debating the timing for potential rate hikes. The problem is that there’s more uncertainty than in any other time in recent history over how many people actually want jobs, making it hard for the economists at the Federal Reserve to accurately predict how much national unemployment has to be tolerated to keep inflation in check. 

That’s because the recession that started in 2008 was exceptionally severe and has shaken up the labor market in ways that aren’t well understood in Washington. For example, the labor participation rate is at the lowest point in 38 years, according to a CNN article from October 2015. Combine that fact with the underemployed and part-time workers, the economy might be further away from full employment than the official measure of unemployment suggests.  

On the flip side of full employment is the American business owner who truly needs to add employees and is unable to locate them. Employers have to bid wages to get and keep the workers they need. According to Bloomberg, retailers such as Wal-Mart and fast food restaurants such as McDonald’s have recently raised pay, and the Federal Reserve has noted, “Increased wages to attract skilled workers for difficult-to-fill positions.” 

Manufacturers, because of their largely baby-boomer workforce and lack of next-generation CNC programmers and machinists, are getting into a bidding war for talent. At our recruiting firm, Diversified Industrial Staffing, we see machinists getting an average pay increase of 20 percent for direct hire, full-time, permanent positions.

And it’s not only wages that are increasing. Sign-on bonuses and other non-wage benefits are beginning to appear in ads from companies desperate to hire in this full employment environment.

According to a review of jobs posted on the job board, indeed.com, there are 33 different manufacturing companies advertising sign-on bonuses for machinists from Spokane, Washington, to Enfield, Connecticut. A shop in Neenah, Wisconsin, is offering a $5,000 sign-on bonus for a second-shift CNC machinist with four years of experience, to work four days per week, 10 hours per day. 

As companies see increased labor costs, a natural reaction is that businesses either have to find new efficiencies, or they raise prices, or start cutting into profit margins. Since they’d generally rather avoid price increases to customers or reduced profits for shareholders, full employment should lead to higher productivity growth and process improvements for all businesses.  

All of this means that employees will earn a higher wage if we’re at full employment, and businesses will become more productive and efficient in order to maintain customers and profits, with potential inflation at a nominal rate, which will please the feds in Washington. 

Thus, employees, businesses and the federal government should want the economy to be at full employment.