The Labor Market Is Tightening Much More Rapidly Than You Think

The BLS announced today that the unemployment rate fell from 7.0% to 6.7% in December. “But, but, the participation rate!” We’ll get back to that.

A number I’ve been beginning to key more on is the unemployment rate/level of men aged 25-54. This isn’t a sexist thing, it’s because men make up 87% of construction employees and 78% of goods-producing employees, the two cyclical areas of the economy that got hit the hardest in 2008. If you’re looking for a recovery in construction, you’re looking for a recovery in peak age male employment, period.

And what we see is the labor market for peak age men is tightening very quickly. The male age 25-54 unemployment rate fell from 6.3% to 5.8% in December, tied for its second-biggest drop of the recovery.

Full employment for peak age men appears to be an unemployment rate of 3-3.5%, so having come from 10% down to 5.8% it would appear that we’re already 2/3 of the way to full employment.

But maybe looking at just men is too limiting – there’s no reason women can’t operate forklifts and hammer nails – so let’s zoom out a little and look at the total level of age 25-54 unemployment.

The age 25-54 unemployment level fell by 400,000 people in December. It peaked at 9.366 million and has fallen by 3.5 million over the past 4+ years. It’s fallen by a million in the past year. At this rate we’ll be near full employment in 2 years, maybe less.

Why less? In the chart below, you’ll see that the growth in the age 55+ employment level (blue line) is decelerating, and is likely to turn negative over the next few years as Baby Boomer retirements accelerate. The red line is age 16-54 employment growth, which should pass age 55+ employment growth in 2014 for the first time in 20+ years. The faster we need to replace retiring workers the faster the peak age unemployment rate will fall.

Another draw on the peak age labor force is likely to happen over the next few years as housing construction continues to normalize (blue line, right axis) and municipalities reap the benefit of a recovery in tax revenues and start adding headcount again (red line, left axis).

So, the participation rate. One reason I’m so dubious about it as an explanation is that first, we’re now 4+ years into an employment recovery and as shown above, we’ve seen a remarkable tightening in the labor market, yet the participation rate refuses to budge. Second, take the college-educated labor force. Its unemployment rate is barely 3%, yet its labor force participation rate has been a straight line down since the 1990’s. Granted 3% is a relatively high unemployment rate for college grads, but it’s hardly something indicative of people unable to find work.

What we have right now is four labor markets.

We have a teen/early 20-something labor market where the participation collapsed as people focused more on education and/or can’t find work. In the long run, this group will be fine.

We have an age 55+ labor market which fared much better over the past 10 years than the rest of the workforce, but will begin to stagnate and shrink as retirements accelerate.

We have a peak-age labor market which is tightening very quickly, and should be near full employment before the 2016 election.

And we have a segment of the labor market, probably somewhere between 1-3 million people, of workers who are some combination of older, less educated, immobile due to being underwater on their homes, or not properly trained for the modern economy, who need major help from the government. They can’t find work at wage levels they’ll accept. Fiscal policy for this group would be 100% effective, but monetary policy at this point is of dubious help.

Econojournalists are rightly focused on this last group, but if they and policymakers ignore the rest of the labor market they’re likely to be shocked in 6-24 months by how fast inflationary pressures emerge.