Long Term Perspective

The civilian unemployment rate can reflect the degree of tightness in the labor market. The unemployment rate generally associated with "full employment" -- the level that causes wage pressures to begin percolating -- is about 5 percent. The question of the “full employment rate” is widely debated among academics and policymakers, and the full employment rate changes over time depending on the demographic structure of the labor force. Given that the jobless rate depends not only on the number of unemployed workers, but also on the number of people in the labor force, it is important that both figures are adequately measured. As suggested in our comments regarding the labor force participation rate, the unemployment rate could be inaccurately measured if potential workers are not job-hunting because they don’t think that they will be able to find employment.

Note that the employment-to-population ratio moves inversely to the jobless rate. A falling unemployment rate is associated with a rising employment-to-population ratio. While the jobless rate declined to 5 percent by the middle of 2005 and even briefly below 4.5 percent in late 2006 and early 2007, the employment-to-population ratio did not at all recover from the employment recession. This measure allows one to analyze the employment situation without worrying about changes in the labor force. Taken together, the jobless rate and the employment-to-population ratio give a more accurate picture of the labor market. Since the employment-to-population ratio has not recovered as much as the jobless rate, it is possible that large numbers of workers may not be entering the labor force during this expansion as in past expansions.

Short Term Perspective

The civilian unemployment rate held steady at 4.7 percent in November from the prior month and was only somewhat above the cyclical low of 4.4 percent most recently set in March of 2007. The jobless rate is well below its peak reached in mid-2003. Yet, the employment-to-population ratio has not enjoyed the same magnitude of improvement. This ratio firmed somewhat during mid-2006, but has slipped again in early 2007 and remains well below the cyclical peak in 2000. The unemployment rate may concern Fed officials as resource utilization remains high – tight labor markets generally lead to price increases.