Everyone should take a deep breath about the labor market

Just how healthy is the U.S. labor market? According to Axios, some economists are starting to worry "whether the economy can keep adding jobs at a fast enough pace to sustain the expansion."

Certainly, the jobs market is not as healthy as it could be. At the same time, there's no real sign of an imminent downturn. What's especially frustrating is that a lot of mainstream experts don't seem to know what to look for, or how to actually understand the challenge.

The number of job openings in the economy is actually higher right now than the number of officially unemployed Americans out there — and the gap widened to its furthest point yet in April. Granted, U.S. unemployment statistics undercount the number of actual people looking for work. But even with that in mind, this basically never happens. The number of official unemployed has almost always outnumbered job openings since we began measuring the ratio. That the situation has finally inverted is good news — it means employers are competing for labor, which will drive up wages, improve working conditions, and start doing something to squash inequality.

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But Axios presents this is an ominous development: "The all-important services side of the economy has been strong, but is beginning to feel the impact of the tight labor market," the outlet wrote, paraphrasing Ahu Yildirmaz, the co-head of ADP Research Institute. They also cite a May poll from the National Federation of Independent Business, in which a quarter of the respondents said that finding qualified workers was their top problem. "Let's remember you need approximately 100,000 net new jobs to keep the economy moving. We're still above that level, however there are so many other factors," Yildirmaz continued.

Now, again, there's a strong case to be made that the economy is still well below full employment. But if we are close to full employment — which is the going assumption in the mainstream — then a slowdown in job creation would be an entirely benign event. We would simply be running out of Americans to employ, because everyone would already have jobs. The only stress this would impose would be on business owners and shareholders, who would have to give up profit margins in order to invest in expansions and pay workers more.

I'm picking on Axios as an example here, but the tendency to treat tight labor markets and full employment as something scary — as a state of gluttony the economy will inevitably be punished for with another downturn — is depressingly common in mainstream journalism and commentary. Hitting the top of the business cycle does not inevitably "cause" the next recession in any sort of mechanical way. There is no intrinsic reason we can’t reach full employment and then stay there for an extended period.

"A recession is a collective loss of faith," Moody's Analytics chief economist Mark Zandi told Axios — which is a rather silly statement. Recessions are caused by concrete events that knock a critical amount of aggregate demand out of the economy: the Federal Reserve hikes interest rates too high, too fast; a housing debt bubble pops, financially wiping out millions of families and seizing up credit markets; a stock bubble bursts and yanks too much business investment out of the economy all at once. The initial job losses set off by that initial hit reduce the amount of spending on goods and services in the economy, setting off further job losses, as the cycle feeds on itself until the economy bottoms out and begins its climb out of the hole.

Are there any signs of that initial hit to jobs in the data? Honestly, no. The official unemployment rate continues to inch its way down. Its descent has slowed, but that's to be expected as we get closer to hiring up everyone out there who could possibly be hired. The same is true for the rate of layoffs in the economy, which is currently lower than it’s ever been in almost two decades. The rate of hiring in the economy is still going up, as is the rate of quits — the latter being a sign of workers' confidence that more and better opportunities are out there. Unemployment claims are still heading down, and are lower than they've been at any point since the 1970s.

These are the sorts of indicators that get us closest to economic fundamentals, and are the most likely to show us when the cycle of job losses have commenced. If the rate of quits or hires reverses and starts falling, or if jobless claims or layoffs start rising, that's generally a sign that a recession is coming, usually in the next six months to a year. But none of those reversals have happened.

Are there any other reasons for concern? Well, indicators like the rates of hires and of quits haven't reversed, but they have slowed down in the last six months or year or so. That matches up with other trends: After growing dramatically in the last year or two, wage growth has been basically flat for the last six months. Unemployment for more vulnerable groups of workers, like African Americans, stopped falling over the same time period. Again, none of these trends have turned south, but they've paused for a long enough time to be noticeable.

While it's entirely possible that U.S. labor markets are just going through a temporary lull, a little insurance wouldn’t hurt. Most obviously, the Federal Reserve could cut interest rates. In fact, it increasingly looks like they might do just that. The Fed should've done it already, and the fact that they haven't is evidence of the central bank's long and deeply unhealthy fixation on inflation at the expense of jobs. We could also pass more fiscal stimulus, but instead lawmakers still want to compete over who can be the most "responsible" deficit-cutter.

What makes the "jitters about the labor market" stories weird isn't just that the basis for the jitters is pretty thin. It's that there are plenty of policies we could easily use to strengthen the economy just in case. All that's stopping us is politics.