Wednesday, August 08, 2007

How much slack in the labor market? 

Taking time off from writing the book, I take time out to read for some of the coursework I will teach during the year. Teaching macro is harder because the examples you would use are scarcer. But seeing today's Job Openings and Labor Turnover study made me remember to pull it for a discussion of the natural rate of unemployment. With some not-terribly-unreasonable assumptions, you can estimate the natural rate by taking the rate at which the unemployed find work (call it f, equal to about 0.685 in June -- that means the number of people hired in a month is about 68.5% of June's number of unemployed) and the rate at which the employed leave jobs (call it s, about .031 or 3.1% of employment) and calculate a natural rate as un = s/(f + s). Using that and the most recent employment report generates a natural rate for June equal to 4.31%. The actual unemployment rate was 4.5% for that month, now rising to 4.6% for July. (JOLTS is a quarterly survey, so we can't update this any more.)

That suggests that while the economy is not overheating, there isn't all that much slack in the market right now. JOLTS also reports a rise in the job vacancy rate (the number of jobs open); Real Time Economics notes the increase in vacancies in retail trade and professional services. There was a big drop in vacancies in construction.