There’s Still Slack in the Labor Market—But Not a Lot

Brad DeLong looks at a chart showing the employment rate of prime-age workers (ages 25-54) compared to January 2000 and says:

Without nominal wage growth of 4%/year or significantly rising inflation, no way I am going to believe that the U.S. economy is in any sense at “full employment” with an essentially zero output gap right now.

It’s not that I disagree, but I think that choosing January 2000 stacks the deck. That’s the absolute peak of the dotcom boom, and there’s no reason to think we’re going to replicate that anytime soon. A better comparison would be the mid-90s, when the economy was strong and growing but not at the peak of a bubble. Here’s what that looks like:

We’re still not at full employment. But we’re getting there: the unemployment rate is low; the expanded unemployment rate is getting close to low; and wages are increasing a bit. Additional inflationary pressure would be yet another sign of a tight labor market, but we haven’t seen that yet.

We still have work to do to get to full employment—and it’s possible we’ll never get back to 1990s levels. That depends a lot on precisely who’s dropped out of the workforce and why. But we’re getting close.