The U.S. labor market passed an important milestone in January, when total nonfarm employment surpassed its pre-recession peak. The recession effectively derailed the creation of six million full-time jobs, and while the workforce has regained enough positions to get back to its 2008 size, that alone may not be enough to put our economy safely back to where it was six years ago. For years, new job creation lagged behind population growth, creating a surplus of labor that will likely take years to erase. Moreover, the working-age population continues to grow, despite the greater numbers of Baby Boomers entering retirement. Currently, the labor force nets around 90,000 new workers every month, further adding to the backlog.
Conservatively, if the broader economy maintains an annual 3 percent rate of growth, the nation won’t reach full employment before 2022—meaning, at current growth rates, the Fed’s maximum employment goal remains more than eight years away.
But weakness in the labor market is not entirely bad news—it indicates there’s a lot of room for growth. Rapid growth generally stresses the labor supply. A normal economy will begin to overheat as wage growth outstrips production, leading to inflation. The present economy, however, could theoretically sustain a 5 percent annual growth rate through 2019 before the labor market slows down. At a more reasonable 4 percent annual growth rate, the labor market will not act as a natural brake until 2020.
Ultimately, the Fed is patient and, regardless of the timeframe, will likely hesitate to take any action that could curb growth while full employment remains so far off. Many large economies face a similarly weak labor market, increasing the potential for strong business growth.
The upside of a slow labor economy? With the recovery only half-finished, business earnings may have more room to run.