The October 2015 jobs report has been released and there’s some good news.
Unemployment is down to 5%. 271,000 jobs were created that month with hiring happening “across the board”, more part time workers continue to find full time work, and wages which have been stagnant, if not falling, for most since 2009, were up in October and now are up 2.5% for the year.  This was a good report, and the slow but steady US recovery seems to be continuing. So much so, the Fed seems ready to start raising interest rates in December.
The Fed raises interest rates when they feel the economy is heating up, to keep inflation in check. Seems they plan to move gradually. John Williams of the San Francisco Fed says the moves would be early and gradual to avoid a “run up” of inflation, (that it’s better to move before inflation heats up), and if the economy weakens “We can stop raising rates” but also says “the economy is already near full employment”.  Clearly they feel the economy is getting to a strong point, but is the picture really so rosy?
As it’s been widely reported, a lot of the fall in unemployment since 2009 has come from people leaving the labor force. Let’s say there is a labor force of 100 people. 90 are employed, 10 are not. The unemployment rate is 10% Let’s say one of these unemployed people stops looking for a job, they are no longer “unemployed”. The labor force now has 99 people, with 90 working, 9 unemployed, leading to a new unemployment rate of 9.1% The number fell, despite no job creation.
Since 2008 the US labor force participation rate, (working age persons who are either working or looking for work) has fallen dramatically.
To get a bigger picture of how drastic the fall has been here’s the LFPR since 1948
We see here the fall in LFPR since the Great Recession has been massive. In fact as of October 2015 it stands at 62.4% the lowest number since 1977. More on this in another post, but for now I’ll just say despite the millions of jobs created since the crisis, millions have also left the labor force. This started to level off only in 2014.
What about inflation?
Though unemployment was down to 5% in October, inflation was just .2% and despite steadily falling unemployment through 2015 towards acceptable numbers, inflation has averaged .03% over the year so far.  However, do the rising wages mean inflation is coming soon?
The EPI put out this report noting 3.5 – 4% growth in nominal wages would be consistent with the Fed’s 2% inflation target, so until nominal wages are consistently rising in that 3.5 – 4% range, there’s not much inflation fear. We are nowhere near that range yet. 
I wonder, given the drop in LFPR, if there is still a lot of “slack “in the labor market, so even if job growth became strong enough that more people started re entering the market, there’d still be plenty of people looking for jobs, more looking than are jobs available. If this is the case there’d be little inflationary pressure.
Is there reason to believe significant labor market slack exists?
Let’s look at the employment to population ratio. “The employment-to-population ratio is the best measure of labor market conditions…”said Paul Ashworth, chief North American economist for Capital Economics, and “The ratio expresses more clearly how many people find working to be a ‘good or attractive deal,'” said Tyler Cowen, economist and director of the Mercatus Center at George Mason University. Of course many working age people don’t want a job because they are in school, or retired. So let’s use the ratio for just ages 25-54. This will leave out college students, retirees, as well as those nearing retirement. This is a measure of the “prime” labor force. Here is the E-P Ratio, 25-54 since 2008. As we see there is still a lot missing since 2008, and is currently at a level not seen since 1986 (seen in the 2nd graph). I believe this shows significant slack exists in the labor market still.
The Fed may think the recovery is nearing the point of heating up, or heading there soon, I’d say the recovery has actually just barely begun.