Unemployment down to 5.6 percent: Is 'full employment' finally getting close?

With nearly 3 million jobs created in 2014 and the US unemployment rate falling in December to 5.6 percent, the progress raises a question: How close is this getting to a “full employment” economy?

That would be one where people who want jobs can generally find them, and where employers feel the impetus to raise wages to compete for good workers.

So the answer matters to American workers.

It also matters to the Federal Reserve, which now has to start thinking increasingly hard about when to start raising its short-term interest rate from the near-zero level where it’s been since 2008. Economists widely expect the Fed to act this year, but some think the move won’t come until 2016.

The short answer, held by most economists, is that full employment isn’t here yet, but over the past year, things have moved a lot closer to that point.

But there’s significant debate among forecasters, with some saying it will still take a couple of years for the job market to be fully recovered and others saying “normal” is a lot nearer now than the naysayers realize.

The recent progress is clear enough. The jobs created, according to the preliminary estimates released by the Labor Department Friday, are the best since 1999. Employers added 252,000 jobs in December alone.

Americans have started feeling better about the economy, with more than half describing it as “good” for the first time since the Great Recession of 2007 to 2009.

And that 5.6 percent unemployment rate is actually just a hair above the level that Fed policymakers currently see as the “central tendency” for the economy: 5.2 to 5.5 percent.

The weaknesses are also still clear.

The number of Americans who have been out of work for half a year or more, while falling, is still historically high. Wage growth has been weak to nonexistent for years. And economists generally say the reasons fewer people are participating in the labor force (by working or looking for work) is partly out of discouragement – not just the demographics of baby boomers entering their retirement years.

Such challenges are prompted Fed economists and others to caution against judging the health of the labor market solely by the official unemployment rate. If someone has stopped looking for work, they aren’t counted in that figure.

The “full employment” optimists right now include analysts at Vanguard, the big mutual-fund company based near Philadelphia. Joseph Davis and other economists there estimate that 80 percent of the decline in labor-force participation could be an essentially permanent feature of the economy driven largely by the aging of the baby boomers.

The other 20 percent of work-force dropouts may reenter the job market as it improves, they figure.

“Based on our estimates, the unemployment rate would be about 0.5 percent higher if these workers were included in the official calculation of unemployment,” the Vanguard economists wrote in a December outlook report.

That was written prior to the new dip in the jobless rate, from 5.8 in November to 5.6 percent in December. Vanguard projects that full employment, by its definition, will be reached some time during 2015.

But more than a few labor experts see a longer road back to normal. Forecasters at the Congressional Budget Office (CBO) estimated last year that  about two-thirds of the decline in labor participation stems from long-term demographic forces.

That view, or other estimates that see even more would-be workers on the sidelines, suggest it could be 2016 or later before “full employment” is a reality.

One encouraging sign: After falling steadily since 2008, the labor participation rate stabilized in 2014 at close to 63 percent of civilians age 16 and up.

That means that at least some of the recession-sidelined workers are diving back into jobs (or at least the job search), putting a temporary halt to the longer term trend – which is still expected to be generally downward as baby boomers retire.

As the labor market tightens, will wage growth follow?

That’s a vital question for millions of workers who have gotten more financial help lately from falling gas prices than from any significant pay raise.

According to Labor Department tracking, the good news is that wages are 1 percent higher today for nonsupervisory workers than they were a year ago, after being adjusted for inflation.

But in December, average hourly wages actually fell by 6 cents, to $20.68 per hour.

A pickup in wage growth, separate from anything induced by cool inflation, may hinge on really getting to full employment.

“Nominal wage growth is likely to pick up only slowly” in 2015, predicts Jan Hatzius, chief economist at Goldman Sachs, in a forecast published in December. That’s based on his view that full employment won’t arrive until some time next year.