labor markets – J. W. Mason

At Groundwork: Lessons from the September Jobs Report

(This was originally posted on the website of the Groundwork Collaborative, where I am a senior fellow. I’m hoping to be doing these more regularly in the future, so if there’s anything that would make them more useful or interesting, please let me know.)

The September Jobs Report: Evidence of Past Success, and of Dangers Ahead

After a gap caused by the government shutdown, employment numbers are back, albeit a month delayed. The Bureau of Labor Statistics conducted its September surveys as usual, though the October surveys were not. This will have longer-term repercussions for U.S. economic data, but for now we can focus on what the September data tell us about the state of the labor market and the economy. The data highlight three key economic facts about the current moment: The post-pandemic fiscal response succeeded in spurring a rapid recovery, the stalling labor market is exacerbating inequality, and perhaps most urgently, a recession looks increasingly likely on the horizon.

U.S. employment data is a complicated beast, assembled from three main data sources.

Employment and unemployment rates, along with various personal characteristics, come from the household survey, conducted by the BLS each month of a large sample of US households. The overall population, along with distribution across basic demographic categories of age, sex, and race, comes from the US census. Census numbers are updated at the start of each year and use projected population increases for the periods in between. Finally, total employment numbers, and their distribution across industries, come from the establishment survey, conducted across a sample of U.S. employers. Because of the immense range of sizes of US businesses and the unpredictable rates at which new businesses are born and existing ones die, contacting a representative sample of businesses is more difficult for businesses than households — the source of the large revisions employment numbers are often subject to.

These three sets of numbers combine to provide the indicators in each month’s Employment Situation report. But because they come from different sources, they are not always consistent with each other.

The big puzzle in the September data is the combination of steady growth in total employment and the continued rise in unemployment. Based on the establishment survey, employment rose by 119,000 between August and September; over the past year, employment is up by 1.3 million, or 0.8%. Yet the household survey shows that the unemployment rate increased by 0.1% in the past month; over the past year the unemployment rate is up by 0.3%, while the labor force participation rate is down by a similar amount. Between rising unemployment and falling labor force participation, there has been a fall in the employment-population ratio of 0.4%, from 60.1% a year ago to 59.7% today.

The only way that all these numbers can be correct is if the working-age population grew by 1.5%. Yet the census estimates used by the BLS show an increase in the working age population of just 1% over the past year And since the census makes its population projections at the start of each year; this 1% growth does not reflect the immigration crackdowns this year; so actual growth in the working-age population was probably slower, possibly much slower. One recent paper from the Dallas Federal Reserve Bank estimates that true growth of the working-age population over the past year might be just 0.25%.It is mathematically impossible for employment to grow by 0.8%, the employment-population ratio to fall by 0.4%, and the working-age population to grow by just 1% (let along 0.25%). All of these numbers cannot be correct. Either actual population growth was faster than we think; or employment growth was slower; or the employment rate is lower (and the unemployment rate higher) than the official numbers say.In my view, the household survey is the most reliable piece of the puzzle; I would be very surprised if the unemployment or laborforce participation rates get significantly revised. The most likely possibility, in my opinion, is that subsequent revisions will show that employment growth was significantly slower than what the current numbers suggest. It’s not impossible that, despite everything, immigration-driven labor force growth has remained strong. But it is more probable that job growth will be revised down.

Turning to the substance of the report, there are three big stories we should keep in mind as we look at the September numbers.

The first big story is that the economic response to the pandemic really worked. Indeed, there is a good case that it was the most successful example of countercyclical policy in US history.

In early 2020, the US experienced the sharpest fall in employment and economic activity in our history. There was good reason to fear that the immediate supply-side disruptions of the pandemic would lead to a collapse in demand, as businesses without sales shut down and laid-off workers stopped spending. But instead, just three years later, the employment rate for people of prime working age (25-54) was higher than it was just before the pandemic and not far short of its all-time high in early 2000.

As the figure nearby shows, this rapid recovery is in marked contrast to other recent recessions, where prime-age employment rates remained below their pre-recession peak for many years into the recovery — as long as 12 years, in the case of 2007.

Source: BLS, Groundwork Collaborative analysis

Some people might say that this reflects the difference in the nature of the shock — that the pandemic was inherently a more short-lived interruption to economic activity than the financial disruptions that triggered earlier recessions. But this misses the way that falls in demand can perpetuate themselves, even once the initial source is removed. Businesses that close down in a crisis do not immediately re-open once the crisis is resolved. When people lose jobs, their reduced income and spending will lead to lower demand elsewhere in the economy; this will depress output and employment regardless of the reasons for the initial job loss.These effects of demand are now well-known to economists under the label hysteresis — today, it is widely agreed that even temporary demand shortfalls can lead to persistent falls in economic activity that greatly outlast the initial shock.There were good reasons to think, in 2020, that this was the path the economy was headed down. Businesses that closed during the pandemic would struggle to reopen; people who lost their jobs, even temporarily, would have to cut back on spending, reducing demand even in sectors of the economy not affected by the pandemic itself. And this would be compounded by a wave of foreclosures and debt defaults; even if the recession didn’t start with a financial crisis, it might have developed into one.

The reason this did not happen was because of the scale of the response from the federal government. For the first time in US history, the government fully replaced the income lost in an economic crisis. So there were no knock-on effects to demand and no permanent scarring to the labor market. That — and not the nature of the shock — is the most important reason why the recovery from the pandemic looked so different from earlier business-cycle recoveries.

This enormous policy success has been crowded out in people’s memory by the subsequent inflation. So it’s worth stressing that this is why the Biden administration was right to make a big stimulus measure its first priority on coming into office.

As you can see in the figure, while there was a strong recovery in the second half of 2020, employment growth was much slower in early 2021. It is easy to imagine, in retrospect, that employment rates might have plateaued somewhere well short of their pre-pandemic levels. Indeed, this is what forecasters at places like the Congressional Budget Office were predicting at the time. In February of 2021, they projected that it would take more than twice as long for total employment to reach pre-pandemic levels as it did in reality. And they were projecting an overall employment population ratio for mid-2025 of 57.5% — more than two full points below September’s actual ratio. The fact that rapid employment growth resumed a few months after the passage of the American Rescue Plan isn’t proof of a connection. But it is certainly suggestive.

Apart from a few months in 2024, today’s prime-age employment rate of 80.7% has been exceeded in only one earlier period, from late 1997 to early 2001. So while there are certainly reasons for concern in the most recent job report — which I will get into in the next two items — the most important thing we should remember is that this historically high employment rate was not inevitable or solely the result of anonymous economic forces. It is the fruit of good policy choices made a few years ago.

The second big story reinforced by recent jobs numbers is that labor market conditions matter for inequality. We can see this today in the much larger rise in unemployment among Black workers.

If one pillar of textbook macroeconomics that has had to be revised in recent years is the idea that demand conditions have no lasting effects on the economy, a second is that labor market conditions only matter for the overall pace of wage growth. The distribution of wages across individuals, in this older view, depends on their “human capital” and other individual characteristics.

But what’s become very clear is that the state of the labor market matters more for some workers than for others. For people whose employment is protected by long-term contracts and credentials, or who are the sort of people that employers prefer — college-educated white men in their prime working years — employment outcomes may be relatively insensitive to the state of the labor market. But for workers in more contingent, precarious employment arrangements, or from groups less favored by employers — Black workers, young people looking for their first jobs, those without college degrees — their prospects depend much more on the balance of power in the labor market. When you are last hired, first fired, your situation depends very strongly on how much hiring and firing is currently going on.

Arguably this has always been true. But it’s become more widely recognized among economists and policymakers in recent years. Not long before the pandemic, for example, Fed Chair Jerome Powell acknowledged the role of weak demand — due in part to poor monetary-policy choices — in exacerbating inequality. This is something previous chairs had disavowed responsibility for.

During the immediate recovery from the pandemic, these distributional effects were positive, as a strong labor market disproportionately benefited those most likely to be left out. In 2021 and 2022, wages at the bottom of the distribution rose substantially faster than those higher up. Similarly, in the strong labor market of the late 2010s, the Black-white gap in unemployment rates fell to historically low levels. In the even stronger labor market of the post-pandemic recovery, it fell even more — in 2023, the gap between the Black unemployment rate and the overall rate briefly fell below 1.5%, the smallest gap on record. (See the figure nearby.)

But over the past year, as the labor market has softened, wage growth at the bottom has begun to lag the growth in wages higher up. And the unemployment rate among Black Americans has risen much faster than among other groups. Over the year ending in September, according to the most recent BLS numbers, the unemployment rate for Black workers is up 1.8 points, compared with a rise of just 0.1 points for white workers.

When Black unemployment started rising sharply compared with the overall rate over the summer, there was the possibility it was a statistical blip. But September’s report confirms that this is a real trend. This is deeply concerning in itself. But it’s also a reminder that keeping up demand and tight labor markets are not just important from a macroeconomic perspective; they are also powerful tools for social justice along other dimensions. And conversely, of course, weak labor markets exacerbate other forms of inequality — as we are seeing now.

The third big story in recent jobs reports is that a recession looks increasingly likely.

In recent years, discussions of recession have often focused on the Sahm Rule, a rule of thumb based on a comparison of the past three months’ average unemployment rate with the lowest three-month average from the previous twelve months. The rule that Claudia Sahm proposed — originally as a trigger for enhanced unemployment benefits, rather than as a forecasting tool per se — was a threshold of 0.5, i.e. an average unemployment rate over the past three months at least half a point higher than the lowest rate in the past year. In recent decades, this has inevitably signaled a recession.

As the figure nearby shows, this threshold was briefly reached in mid-2024, without any official recession. The indicator has since receded back toward zero — not because the unemployment rate has come down, but because the big rise in unemployment came in 2023, and has now moved beyond the rule’s window. Since then, measured unemployment has been fairly stable.

It is worth thinking about why a rule like this might work in the first place. The critical fact about the world highlighted by the Sahm rule is that moderate increases in unemployment are, historically, almost always followed by much larger increases. This is not something that just happens to be true. It reflects a basic fact about how the economy works: Income creates spending, and spending creates incomes. This positive feedback loop is what powers growth — when businesses undertake new investment projects, that spending circulates through the economy, creating additional income and spending that, in the aggregate, justifies the investment spending.But this process can also work in reverse. A fall in spending leads to a fall in incomes, which leads to a further fall in spending. The difference between these two feedbacks is the reason our economy experiences distinct periods of expansion and recession, rather than a smooth range of different growth rates.There are metaphors that are widely used in talking about business cycles that capture the idea of tipping points or phase transitions. An airplane has a stall speed: if it slows down a bit, it flies a bit slower, but if it slows down too much then it stops flying entirely and falls to the ground. A car trying to go up an icy hill needs to build up a enough speed to make it to the top; if it goes faster than this, it will arrive at the top going faster, but if it goes slower, it will slip back down and won’t make it to the top at all.

The idea that a certain level of growth in demand is required to prevent a sharp fall in demand is a familiar one in practical economic discussions, even if it’s not always stated clearly. It’s implicit in the idea of business cycles and recessions as distinct phenomena in their own right, as opposed to just labels of convenience for unusually large random shocks. There are many reasons why this sort of “stall speed” might exist, but two of the most important are the “accelerator” mechanism linking investment and demand, and the limited financial buffers possessed by most households.

We needn’t go into the details of these stories in this post; the key point for present purposes is that there are good reasons why a small fall in employment or expenditure is likely to reverse itself, but a large enough fall will snowball into an even bigger one. This is why the Sahm rule is not just a historical accident, but captures an important business-cycle regularity.

The unemployment rate is our most timely indicator of the overall level of economic activity. A large rise in unemployment is not just a negative outcome in itself; it indicates a fall in spending and activity that will have further effects. Over the past two years unemployment has risen by almost a full point — too slowly to trigger the Sahm rule, but a large enough rise that, based on historical experience, we would expect to be near the recession tipping point. At the least, it suggests a situation in which any new negative shock — an abrupt slowdown in data-center investment, for instance — could send the economy out of what the great Keynesian economist Axel Leijonhufvud described as the “corridor of stability,” and into a recessionary spiral.

One final point: There is no reason to think that this data is distorted or politically biased.

Attacks on professional norms are a hallmark of the Trump approach to governance. But while the administration can certainly interfere with timely collection and publication of data, and while, even in the best of times, there are serious challenges to constructing meaningful summaries of all the myriad forms of economic activity, there is no reason to think there is political interference in the employment data. More than that: I would say there is strong reason to believe that there isn’t. Given the deep commitment to the civil servants at the BLS and other national statistical agencies, if there were any pressure on them to change the numbers, we would certainly hear about it.

At Barron’s: The Fed’s View of the Economy Matters for More than Monetary Policy

(I write a monthly opinion piece for Barron’s. This is the most recent one; you can find earlier ones here.)

Has the inflationary fever broken at last? The headline Consumer Price Index, which was rising at a 17 percent annual rate last June, actually fell in December. Other measures show a similar, if less dramatic, slowing of price growth. But before we all start congratulating the Federal Reserve, we should think carefully about what else we’re signing up for.

For Fed Chair Jerome Powell, it’s clear that slower price growth is not enough. Inflation may be coming down, but labor markets are still much too tight. “Nominal wages have been growing at a pace well above what would be consistent with 2 percent inflation over time,” he said recently, so “another condition we are looking for is the restoration of balance between supply and demand in the labor market.”

The model of the economy that the Fed is working with looks something like this: most prices are, at the end of the day, set as a markup over wages. Wage increases depend on the relative bargaining power of workers and employers, and that in turn depends on labor market tightness. Labor market tightness depends on aggregate demand, which the Fed can influence through interest rates. Yes, there are other influences on inflation; but it’s clear that for the Fed this story is central. Indeed, we might call it the Federal Reserve View.

Is this story a fair description of the real world? Yes and no.

A useful rule to remember is that the rise in average wages must equal the rise in the price of domestically-produced goods, plus productivity growth, plus the share of income going to workers. All else equal, higher wages mean higher prices. But all else is not always equal. It’s possible to have faster wage growth and stable inflation if profit margins are falling, or if productivity is rising, or if import prices are falling.

In the short run, these other factors can easily outweigh wage growth. Just look at the 10 years prior to the pandemic. Hourly wages grew almost twice as fast in the second half of the decade as in the first half — nearly 4 percent annually, versus 2 percent. Yet inflation as measured by the CPI was no higher over 2015-2019 than over 2010-2014. That was thanks to productivity growth, which accelerated significantly, and import prices, which declined. (Workers’ share of national income did not change significantly.)

On the other hand, there is a limit to how fast productivity can rise, or profit margins or import prices can fall. No one doubts that if wages were to rise by, say, 10 percent year after year, inflation would eventually rise.

Critics of the Fed have questioned whether these long-run relationships tell us much about the inflation we are seeing now. There are plenty of things that cannot go on forever but can, and should, go on for a while. Rapid wage gains might be one of them. While Powell clearly still sees wage growth as excessive, others might look at the latest Employment Cost Index—less than 1% growth, compared with 1.4% at the start of 2022—and see a problem taking care of itself.

The Fed’s current plan is to increase unemployment by 1 percent over the next year, throwing 1.6 million people out of work. If the link between labor market conditions and prices is not as tight as they think, that’s a lot of suffering being inflicted for no reason.

But there’s an even bigger problem with the Federal Reserve View: what else follows once you accept it. If price stability requires a weaker labor market – one in which employers have an easier time finding workers, and workers have a harder time finding jobs – that has implications that go far beyond monetary policy.

Take the Fair Trade Commission’s recent ban on non-compete clauses in employment contracts. When President Biden issued the executive order that led to this action, he explicitly framed it as a way of shifting bargaining power to workers and allowing them to demand higher pay. “If your employer wants to keep you,” he said, “he or she should have to make it worth your while to stay.”

This sounds like good news for workers. But here’s the problem: from the Fed’s point of view, businesses are already paying too much to hold onto their employees. As Powell has said repeatedly over the past year, there is currently a “real imbalance in wage negotiating” in favor of workers. He wants to make it harder for people to switch jobs, not easier. So if the non-compete ban delivers what the President promised, that will just mean that rates have to go up by more.

Or think about minimum wage laws. Thanks to widespread indexing, nearly half the states saw significant increases in their minimum wages at the start of this year. Others, like New York, are moving in this direction. For many people the case for indexing is obvious: It makes sure that the incomes of low-wage workers in retail, fast food and other services keep pace with rising prices. But for the Fed, these are exactly the wages that are already rising too fast. Higher minimum wages, from the Fed’s point of view, call for higher interest rates and unemployment.

There’s nothing new or secret about this. In a typical macroeconomics textbook, the first example of something that raises the “natural rate” of unemployment (the one the central bank targets) is more generous unemployment benefits, which encourage workers to hold out for higher wages.

Publicly, the Fed disavows any responsibility for labor market policy. But obviously, if your goal is to maintain a certain balance of power between workers and employers, anything that shifts that balance is going to concern you.

This problem had dropped from view in recent years, when the Fed was struggling to get inflation up to its target. But historically, there’s been a clear conflict between protecting workers and keeping unemployment low. Under Alan Greenspan, Fed officials often worried that any revival of organized labor could make the job of inflation control harder. Treasury Secretary Yellen made a version of this argument early on in her career at the Fed, observing that “lower unemployment benefits or decreased unionization could … result in a decline in workers’ bargaining power.” This, she explained, could be a positive development, since it would imply “a permanent reduction in the natural rate of unemployment.”

Unfortunately, the same logic works the other way too. Stronger unions, higher minimum wages, and other protections for workers must, if you accept the Federal Reserve View, result in a higher natural rate of unemployment — which means more restrictive monetary policy to bring it about.

It’s easy to understand why administration officials would say they trust the Fed to manage inflation, while they focus on being the most-pro-labor administration in history. Unfortunately, dividing things up this way may not be as simple as it sounds. If that’s what they think their job is, they may have to challenge how the Fed thinks about its own.

At Barron’s: What’s At Stake in the Labor Market?

(I am now writing a monthly opinion piece for Barron’s. This one was published there in August.)

The labor market is exceptionally tight, at least by the standards of recent history. That matters for monetary policy, but its importance goes beyond inflation, or even material living standards. We are used to a world where workers compete for jobs. A world where businesses compete for workers would look very different.

Today’s 3.5% unemployment rate is lower than any time between 1970 and 2019. While the prime-age employment-population ratio is still shy of its prepandemic level, other measures imply a labor market even hotter than at the height of the late-90s boom. Both the historically high rate of workers quitting their jobs and the nearly two job openings for each unemployed worker suggest that this could be the best time to be looking for a job in most Americans’ working lives.

How long this will continue depends in large part on the Federal Reserve, where the question often comes down to whether inflation expectations are anchored. If businesses and households come to believe that prices will rise rapidly, the argument goes, they will behave in ways that cause prices to rise, validating those beliefs and making it harder to bring inflation back down.

Curiously, there is little discussion of all the other expectations that can also be anchored in different ways, which suggest a very different set of trade-offs.

Businesses that expect growth to be weak, for example, are unlikely to invest in raising capacity—which makes strong growth much harder to achieve. Workers who feel it’s impossible to find a job may stop looking for one, making expectations of weak employment growth self-confirming. Both these expectational shifts played a role in the “lost decade” after the 2007 crash.

Today’s tight labor markets are reshaping expectations in a different direction, which could lead to lasting changes in employment dynamics. As economist Julia Coronado observes, one lesson businesses seem to have learned is that staffing up may be slower and more difficult than in the past. This in turn makes businesses more hesitant to lay off workers, even when demand slackens.

Fewer layoffs, of course, contribute to tighter labor markets—another example of self-confirming expectations. But those new expectations also mean a different kind of employment relationship. A business that expects labor to be cheap and abundant has little reason to invest in recruiting, retaining and training its employees. Conversely, a business that can’t count on quickly hiring workers with whatever skills are needed has to focus more on developing and holding on to the workers it has. These qualitative changes in the organization of work aren’t captured in the aggregate numbers on employment and wages.

To be clear, there is not a labor shortage in any absolute terms. One thing we have clearly learned over the past year is that total employment isn’t just a matter of how many people are willing to work. Back in spring 2021, some economists argued that generous pandemic unemployment assistance was holding back job growth. When some states ended unemployment assistance early, that offered the perfect controlled test of this theory. It was decisively refuted. As the labor economist Arin Dube has shown, employment growth was no faster in the states that ended pandemic unemployment relief earlier than in those that kept it longer.

What is true, though, is that the kinds of jobs people will take may depend on their other options. For the economy as a whole, today’s high rate of movement between jobs is a clear positive. A big reason people can get raises by changing jobs is, presumably, that their new work is more valuable than what they were doing before. But from the point of view of employers, this is a process with winners and losers. Some businesses will adapt, offering higher wages—as many food service and retail giants are already doing—and nonpecuniary benefits such as predictable schedules and pathways for advancement. Tight labor markets will also favor higher-productivity businesses, which can afford to pay higher wages. Those that are wedded to a model that treats labor as cheap and disposable, on the other hand, may struggle or fail.

It isn’t only employers that need to adjust to tight labor markets, of course. There is little doubt that the upsurge of union organizing we’ve seen in recent years owes a great deal to labor market conditions. When jobs are plentiful, the fear of losing yours is less of a deterrent to standing up to the boss. And people who are reasonably confident of at least getting a paycheck may begin to wonder if that is all their employer owes them.

Historically, periods of rapid union growth have followed sustained growth, not depressions and crises. During the 1972 strike at GM’s Lordstown plant—one of the high points of 1970s labor militancy—one union leader explained why the younger workers were so ready to walk off their jobs:

“None of these guys came over from the old country poor and starving, grateful for any job they could get. None of them have been through a depression …They’re just not going to swallow the same kind of treatment their fathers did. That’s a lot of what the strike was about. They want more than just a job for 30 years.”

Strikes like Lordstown are rooted not just in conditions at the particular workplace, but also in the ways a prolonged high-pressure economy shifts what workers expect from a job. Significantly, the Lordstown strikers’ demands included a say in the design and organization of the plant, as well as better pay and benefits.

Not everyone would welcome a revived U.S. labor movement, of course, or a move toward German-style co-determination. While some people see unions as a pillar of democracy and counterweight to corporations’ political power, others see them as an illegitimate intrusion on the rights of business owners. Either way, whether organized labor can reverse its decline is a question with consequences that go far beyond next month’s inflation numbers. And it depends a great deal on how long today’s tight labor market lasts.

It might seem utopian to imagine a transformation of the workplace when the headlines are dominated by inflation and recession fears. But the real fantasy is to imagine we could reap the benefits of a high-pressure economy—faster productivity growth, a more equal distribution of income, more resources to solve our most pressing problems—without making any changes to how firms and labor markets are organized.

In his most recent press conference, Federal Reserve Chair Jerome Powell said, “we all want to get back to the kind of labor market we had before the pandemic.” Do we really all want that, or could we aim higher? But in any case simply turning back the clock isn’t an option. An economy adapted to slow growth and cheap, abundant workers can’t adjust to tight labor markets without changing in profound ways.

Some may welcome an economy where chronically scarce labor means that businesses are under constant pressure to raise productivity and attract and retain employees. Others may hope for a deep recession to reset expectations about the relative scarcity of workers and jobs. One way or the other, those are the stakes.

Video: The Macro Case for the Green New Deal

(Earlier this week, I gave a virtual presentation at an event organized by the Roosevelt Institute and the Green New Deal Network. Virtual events are inferior to live ones in many, many ways. But one way they are better, is that they are necessarily on video, and can be shared. Anyway, here is 25 minutes on why the economic situation calls for even more spending than the (surprisingly ambitious) proposals from the Biden administration, and also on why full employment shouldn’t be seen as an alternative to social justice and equity goals but as the best way of advancing them.)

Good News on the Economy, Bad News on Economic Policy

(Cross-posted from the Roosevelt Institute blog. I am hoping to start doing these kinds of posts on new economic data somewhat regularly.)

On Friday, the the Bureau of Labor Statistics released the unemployment figures for May. As expected, the reported unemployment rate was very low—3.6 percent, the same as last month. Combined with the steady growth in employment over the past few years, this level of unemployment—not seen since the 1960s—suggests an exceptionally strong labor market by historical standards. On one level this really is good news for the economy. But at the same time it is very bad news for economic policy: The fact that employment this low is possible, shows that we have fallen even farther short of full employment in earlier years than we thought.

Some skeptics, of course, will cast doubts on how meaningful the BLS numbers are. The headline unemployment rate, they will argue, understates true slack in the labor market; many of the jobs being created are low-wage and insecure; workers’ overall position is still weak and precarious by historical standards.

This is all true. But it is also true that the unemployment numbers are not an isolated outlier. Virtually every other measure also suggests a labor market that is relatively favorable to workers, at least by the standards of the past 20 years.

The broader unemployment measures published by the BLS, while higher than the headline rate, have come down more or less in lockstep with it. (The new release shows that the BLS’s broadest measure of unemployment, U-6, continued to decline in May, thanks to a steep fall in the number of people working part-time because they can’t find full-time work.) The labor force participation rate, after declining for a number of years, has now started to trend back upward, suggesting that people who might have given up on finding a job a few years ago are once again finding it worthwhile to look for one. The fraction of workers voluntarily quitting their jobs, at 2.3 percent, is now higher than it ever got during the previous business cycle. The quit rate is a good measure of labor market tightness—one of former Fed chair Janet Yellen’s preferred measures—because it shows you how people evaluate their own job prospects; people are much more likely to quit their current job if they expect to get a better one. Reported job openings, a longstanding measure of labor market conditions, are at their highest level on record, with employers reporting that nearly 5 percent of positions are unfilled. Wage growth, which was nowhere to be seen well into the official recovery, has finally begun to pick up, with wage growth noticeably faster since 2016 than in the first six years of the expansion. In the nonfinancial business sector—where the shares of labor and capital are most easily measured—the share of value added going to labor has finally begun to tick up, from a steady 57 percent from 2011 to 2014 up to 59 percent by 2017. Though still far short of the 65 percent of value added claimed by labor at the height of the late-1990s boom, the recent increase does suggest an environment in which bargaining power has at last begun to shift in favor of workers.

For progressives, it can be a challenge to talk about the strengthening labor market. Our first instinct is often to call attention to the ways in which workers’ position is still worse than it was a generation ago, and to all the ways that the labor market is still rigged in favor of employers. This instinct is not wrong, but it is only one side of the picture. At the same time, we need to call attention to the real gains to working people from a high-pressure economy—one where aggregate demand is running ahead of available labor.

A high-pressure economy is especially important for those at the back of the hiring queue. People sometimes say that full employment is fine, but that it doesn’t help people of color, younger people, or those without college degrees. This thinking, however, is backwards. It is educated white men with plenty of experience whose job prospects depend least on overall labor market conditions; their employment prospects are good whether overall unemployment rates are high or low. It is those at the back of the hiring queue—Black Americans, those who have received less education, people with criminal records, and others discriminated against by potential employers—who depend much more on a strong labor market. The Atlanta Fed’s useful wage tracker shows this clearly: Wage growth for lower-wage, non-white, and less-educated workers lagged behind that of college-educated white workers during the high-unemployment years following the recession. Since 2016, however, that pattern has reversed, with the biggest wage gains for nonwhite workers and those at the bottom of the wage distribution. This pattern has been documented in careful empirical work by Josh Bivens and Ben Zipperer of the Economic Policy Institute, who show that, historically, tight labor markets have disproportionately benefited Black workers and raised wages most at the bottom.

Does this mean we should be satisfied with the state of macroeconomic policy—if not in every detail, at least with its broad direction?

No, it means just the opposite. Labor markets do seem to be doing well today. But that only shows that macroeconomic performance over the past decade was even worse than we thought.

This is true in a precise sense. Macroeconomic policy always aims at keeping the economy near some target. Whether we define the target as potential output or full employment, the goal of policy is to keep the actual level of activity as close to it as possible. But we can’t see the target directly. We know how high gross domestic product (GDP) growth is or how low unemployment is, but we don’t know how high or how low they could be. Everyone agrees that the US fell short of full employment for much of the past decade, but we don’t know how far short. Every month that the US records an unemployment rate below 4 percent suggests that these low unemployment rates are indeed sustainable. Which means that they should be the benchmark for full employment. Which also means that the economy fell that much further short of full employment in the years after the 2008-2009 recession—and, indeed, in the years before it.

For example: In 2014, the headline unemployment rate averaged 6.2 percent. At that time, the benchmark for full employment (technically, the non-accelerating inflation rate of unemployment, or NAIRU) used by the federal government was 4.8 percent, suggesting a 1.4 point shortfall, equivalent to 2.2 million excess people out of work. But let’s suppose that today’s unemployment rate of 3.6 percent is sustainable—which it certainly seems to be, given that it is, in fact, being sustained. Then the unemployment rate in 2014 wasn’t 1.4 points too high but 2.6 points too high, which is nearly twice as big of a gap as policymakers thought at the time. Again, this implies that the failure of demand management after the Great Recession was even worse than we thought.

And not just after it. For most of the previous expansion, unemployment was above 5 percent, and the labor share was falling. At the time, this was considered full employment – indeed, the self-congratulation over the so-called Great Moderation and “amazing success” of economic policy reached a crescendo in this period. But if a perofrmance like today’s was possible then — and why shouldn’t it have been? — then what policymakers were actually presiding over was an extended stagnation. As Minnesota Fed chair Narayan Kocherlakota – one of the the few people at the economic-policy high table who seems to have learned something from the past decade – points out, the US “output gap has been negative for almost the entirety of the current millenium.”

These mistakes have consequences. For years now, we have been repeatedly told that the US is at or above full employment—claims that have been repeatedly proved wrong as the labor market continues to strengthen. Only three years ago, respectable opinion dismissed the idea that, with sufficient stimulus, the unemployment could fall below 4 percent as absurd. As a result, we spent years talking about how to rein in demand and bring down the deficit, when in retrospect it is clear that we should have been talking about big new public spending programs to boost demand.

This, then, is a lesson we can draw from today’s strong unemployment numbers. Strong economic growth does improve the bargaining position of workers relative to employers, just as it has in the past. The fact that the genuine gains for working people over the past couple years have only begun to roll back the losses of the past 20 doesn’t mean that strong demand is not an important goal for policy. It means that we need much more of it, sustained for much longer. More fundamentally, strong labor markets today are no grounds for complacency about the state of macroeconomic policy. Again, the fact that today’s labor market outcomes are better than people thought possible a few years ago shows that the earlier outcomes were even worse than we thought. The lesson we should take is not that today’s good numbers are somehow fake; they are real, or at least they reflect a real shift from the position of a few years ago. Rather, the lesson we should take is that we need to set our sights higher. If today’s strong labor markets are sustainable—and there’s no reason to think that they are not—then we should not accept a macroeconomic policy consensus that has been willing to settle for so much less for so long.