The US Labour Market: How Much Slack Remains?

Despite the US unemployment rate being close to estimates of the non-accelerating-inflation rate of unemployment (NAIRU), measures of underemployment remain elevated, which could be an indication of remaining labour market slack. The shares of involuntary part-time workers and long-term unemployment are high relative to the current stage of the business cycle, suggesting available labour inputs are being underutilized. Improvement in these areas could meaningfully increase US labour utilization and support economic growth. Another large potential source of labour market slack exists outside the labour force caused by the relatively low participation rate, which has fallen by more than 3 percentage points since 2007. Most analysis, including that in this note, finds that the aging population is an important factor behind this decline, indicating that there is less slack than implied by the drop in the headline participation rate. However, there is considerable uncertainty about whether the decline in participation unrelated to aging is driven by structural or cyclical phenomena and is therefore representative of slack. Nevertheless, a review of the historical experience suggests that a sizable number of persons outside the labour force could be “activated” and drawn back into the market under much “hotter” labour market conditions. But further research is needed to assess whether the historical relationship is a relevant guide in the current context.