Blog: Is Full Employment a Good Thing?

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In February, Fortune magazine declared that the U.S. was at “full employment.”  In round numbers, that would equate to an unemployment rate of under 5 percent, with a labor participation rate above 64 percent. While not every economist is in full agreement with the magazine, there is significant evidence that the labor market is drying up for employers who need to add employees or replace employees who are retiring or leaving for new job opportunities.

What does full employment mean to businesses and employees, and is it a good thing for the economy?

First, it’s important to understand how full employment is defined. Full employment is a term economists use to signify an economy that is considered to be in balance, where there is no longer cyclical economic weakness, but also no pressures pushing the inflation rate ever higher. To be clear — the term doesn’t signify an economy in which everyone who is of working age and able bodied has a job, nor does it imply that employees feel that they have a good job or a job they feel is up to their skillset. Essentially, full employment means that unemployment has fallen to the lowest possible level without provoking inflation.

A byproduct of full employment for all of us is that that an increase to interest rates by the Federal Reserve could be coming in the near future. As the labor market tightens, the Federal Reserve is debating the timing for potential rate hikes. The problem being faced by the Federal Reserve is that there’s more uncertainty than in any other time in recent history over how many people actually want jobs, making it hard for the economists at the Federal Reserve to accurately predict how much national unemployment has to be tolerated to keep inflation in check.

That’s because the recession that started in 2008 was exceptionally severe and has shaken up the labor market in ways that aren’t well understood in Washington. For example, the labor participation rate is at its lowest point in 38 years, according to a CNN article from October 2015. Combine that fact with underemployed and part-time workers, and the economy might be further away from full employment than the main official measure of unemployment suggests.

On the flip side of the full employment equation is the American business owner who truly needs to add employees and is unable to find them. Employers have to bid wages up to hire and keep the workers they need. According to Bloomberg, retailers such as Wal-Mart and fast food restaurants like McDonald’s have recently raised pay and the Federal Reserve has noted “increased wages to attract skilled workers for difficult-to-fill positions.”

Manufacturers — due to their largely baby-boomer workforce and lack of next generation welders and CNC programmers and machinists — are getting into a bidding war for talent. At our recruiting firm Diversified Industrial Staffing, we see machinists getting an average pay increase of 20 percent for direct hire, full-time, permanent positions.

And it’s not just wages; sign-on bonuses and other non-wage benefits are beginning to appear in advertisements as companies desperate to hire in this full employment environment.

According to a review of jobs posted on the job board Indeed.com in March, there were 33 different manufacturing companies advertising sign-on bonuses for machinists from Spokane, Wash. to Enfield, Conn. KimberlyClark, and Co. in Neenah, Wis. is offering a $5,000 sign on bonus for a second shift CNC Machinist with four years of experience, who is working four days per week, 10 hours per day.

As companies see increased labor costs, a natural reaction will be that businesses either have to find new efficiencies, raise prices, or start cutting into profit margins. Since they’d generally rather avoid price increases to customers or reduced profits for shareholders, full employment should lead to higher productivity growth and process improvements throughout all businesses.

All of which means that employees will earn a higher wage if we’re at full employment, and businesses will become more productive and efficient in adding customers and boosting profits, with potential inflation at a nominal rate, which will please the Feds in Washington.

Thus, employees, businesses, and the federal government would like the economy to be at full employment.

Todd Palmer is founder and president of Troy-based Diversified Industrial Staffing and Diversified PEOple LLC and a regular contributor to DBusiness. ​

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