The Incredible Shrinking Workforce

When the latest jobs report comes out Friday, look beyond the top-line number. For months now economists have suggested that the low unemployment rate—4.1% as of last month’s report—implies that America is at or near full employment. Yet the labor market is still below its prerecession peak, with about two million jobs missing. Many of those workers have joined the disability rolls. Others have simply dropped out of the workforce in favor of leisure time.

The best evidence that the economy isn’t at full employment is that it is creating too many jobs. When the economy is recovering from a recession, employment grows faster than the population does, making up for jobs previously lost. In contrast, at full employment, job growth equals population growth, keeping employment rates steady. Which situation holds today? During the past three months, the U.S. economy has added jobs at a rate that is about double what’s needed to keep up with population growth. This implies the labor market is still recovering.

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