In a recent post Scott Sumner muses:
For the past few years I’ve been suggesting that the labor force participation rate is not going to bounce back. Commenters have insisted that the workers were just “discouraged”, and that they’d come back in and start looking for jobs when the labor market got somewhat better.
Today the unemployment rate fell to 5.1%. If that’s not the natural rate, it’s pretty close. Close enough so that if you really wanted a job you should at least be looking by now. And yet the Labor force participation rate is 62.6%, the lowest level since the 1970s. No, I’m afraid the discouraged workers are gone for good. Indeed the Fed wants to tighten now to prevent the job market from overheating!
In the next post he asks:
What is the total number of months during the Ford, Carter, Reagan and Bush I administrations, plus the first term of Clinton, when the unemployment rate was lower than today?
(March 1989, when it was 5.0%)
Come on discouraged workers, get out there and start looking!
Nevertheless, taking a longer view, below several instances (many more in the 60s and 90s) of unemployment below 5.1% and the corresponding YoY core pce inflation:
Nov/66: 3.6% – 3.1%
Nov/73: 4.8% – 4.8%
Mar/89: 5.0% – 4.5%
Apr/00: 3.8% – 1.7%
May/07: 4.4% – 2.0%
Now: 5.1% – 1.2%
However, it is disturbing to see, as shown in the chart below, that monetary policy failures (letting NGDP growth drop significantly, or even tank) has permanent real effects, in this case causing a permanent drop in the labor force participation rate (even considering only prime-age workers). And the Fed Borgs think more “tightening” is needed!
Therefore, saying that 5.1% unemployment is indicative of a “tight” labor market is nonsense! What is “tight” and remains “tight” is monetary policy.
The following chart indicates that higher employment growth could be forthcoming with higher nominal spending growth. Unfortunately, the Borgs don´t seem willing to experiment!