Should-Read: So is it now time to shift to the prime-age employment rate as our principal thumbnail shorthand gauge for the state of the labor market?: Nick Bunker: Just how tight is the U.S. labor market?: “Spoiler: There’s room for the job market to improve…

…If the current unemployment rate is indicative of a very tight labor market, then why does wage growth continue to be so tepid? If the supply of potentially employable workers is tapped out, then the price of labor—wages—should grow at an increasingly faster pace. Yet as the unemployment rate declined and hit levels many associate with “full employment,” wage growth has yet to break out of the range of 2 percent to 2.5 percent per year. One simple explanation of this anomaly of a tight labor market with weak wage growth is that the labor market is not actually that tight. Indeed, the unemployment rate currently does not do a good job of predicting wage growth. What the data show is that a given unemployment rate can be associated with a wide range of wage-growth levels….

The unemployment rate is still a useful measure of the health of the labor market. But it should be taken in the context of other measures. Even if two labor markets have the same unemployment rate, one will be tighter than the other if their employment rates vary significantly. When assessing the health of the labor market, policymakers have to look at both unemployment and employment. If the U.S. labor market still has room to run, then policymakers should look favorably at monetary and fiscal policies that would increase aggregate demand. This information is particularly important for policymakers at the Federal Reserve as they consider the pace at which they raise interest rates…

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