By Neeta P. Fogg and Paul E. Harrington
As 2014 comes to a close and we engage in holiday celebrations with a sense of renewal that typically comes with the beginning of a new year, the labor market offers one more reason for some optimism. Job seekers are in much better shape this year as firms step up hiring and the monthly number of job vacancies (unfilled jobs) has increased sharply over the year. Employers across the nation reported more than 4.8 million unfilled jobs on the last business day of October, up from 4 million a year ago, as payroll employment continued to rise, adding an average of more than 220,000 jobs per month over the year. This surge in the demand for labor has resulted in the number unemployed persons falling from 11.1 million to 9 million over the last 12 months.
Declining unemployment and rising job vacancies means that labor markets are tightening up and that job prospects have improved for many labor market participants. One way economists measure the strength of labor demand is with the ratio of unemployed workers to unfilled jobs. Known as the Beveridge measure, this ratio suggests that an economy achieves full employment when the number of unemployed workers is about equal to the number of vacant jobs. ‘Beveridge full employment’ occurs when the level of aggregate economic activity is sufficient to put active job seekers to work. Any remaining unemployment in a Beveridge full-employment economy (which can be considerable) is not the result of inadequate demand for labor, but is instead the result of any of a number of inefficiencies in the labor market that pose barriers to work for job seekers and barriers to hiring for employers.
The last time the U.S. met this full employment criterion was back in 2000, at the tail end of the Clinton boom, when job growth was strong, real wages were rising and many occupations and regions were characterized by labor shortage conditions. At that time, the number of unemployed persons was about the same as the number of unfilled (or vacant) jobs—achieving the Beveridge definition of a full-employment economy. The dot.com bust of 2001 took care of labor shortage problems in short order. Large-scale job losses reduced hiring and rising unemployment caused the U/V ratio to increase to nearly three unemployed workers per vacant job, by the middle of 2003. This meant that the level of labor demand was insufficient to absorb about two-thirds of all unemployed job seekers and that the economy needed a boost.
Over the next few years (2003 to 2007), the Bush economic expansion continued, accompanied by a more robust job growth, driving down unemployment and causing a considerable expansion in the number of unfilled jobs. By the middle of 2006, labor markets had tightened considerably and the overall U/V ratio had declined to around 1.6 unemployed workers per vacant job. Evidence of spot labor shortages emerged in health services, information (technology) and the finance industry as demand for workers with college degrees, relevant to firms in those sectors, grew rapidly. But once again, economic recession mitigated any threats of a lasting labor shortage problem—this time on a historically large scale.
The Great Recession that began in earnest with the Lehman Brothers collapse in September 2008 saw an explosion in the size of the U/V ratio as the nation’s employers, plagued by staggering revenue and wealth losses moved to reduce expenses through hiring freezes, lay-offs, reduced hours of work and wage rollbacks. One of the most important consequences of these adjustments was that by the third quarter of 2009 a massive problem of excess labor supply emerged as 15.3 million unemployed workers sought just under 2.4 million vacant jobs, yielding an unemployed workers to vacant jobs ratio of about 6.5 (representing 6.5 officially unemployed workers per vacant job) and signaling a massive problem of excess labor supply as the labor market experienced precipitous declines in payroll employment, massive dislocation of experienced workers and a stinging rise in unemployment durations as more job seekers competed for fewer job vacancies.
The lopsided nature of the excess labor supply problem was especially apparent in industries that primarily employed blue-collar workers. The U/V ratio in construction rose to a stunning 34:1 by 2009 as construction payroll employment dried up. There were 21 unemployed durable goods manufacturing workers—previously employed in industries like auto and truck production and metal machining and fabrication—for every unfilled job in those industries. Even health services where HR staff had been constantly struggling to fill registered nurse and other health practitioner jobs saw growing labor supply reserves in a market once characterized by shortage but was now facing a surplus as the nation’s job market sank under the weight of economic decline.
The nation’s labor markets have been engaged in a five-year struggle to recover the jobs lost during the recession. In recent months the pace of the jobs recovery has accelerated and the nation’s overall U/V ratio has moved considerably closer toward the full employment level. The October 2014 U/V ratio fell to 1.86; a third consecutive month with the U/V ratio below 2:1. The very strong national job gains reported for November suggests a further potential for reducing the U/V ratio in the coming months and this is continued good news for jobs seekers. Reductions in the nation’s massive level of labor surplus means that employers, at least in those states with below average unemployment rates may have more difficulty in filling positions in higher skill occupations, at the prevailing wage rate.
Although overall inflation-adjusted hourly wages have not yet begun to grow much, we may start seeing employers up their wage bids for workers in occupations where skills are in high demand but not many unemployed job seekers remain. With a U/V ratio hovering around 1.9: 1.0 there is still plenty of excess labor supply in most industries and occupations in the nation. But if the pace of job growth remains at current levels, further reductions in the U/V ratio can be expected along with an expansion of spot labor shortages in some states.
By Neeta P. Fogg and Paul E. Harrington, labor market economists in the Center for Labor Markets and Policy at Drexel University. Follow the Center on Twitter at http://www.twitter.com/clmpdrexel.
Members of the news media who are interested in speaking further with Fogg or Harrington, can contact Alex McKechnie at email@example.com or 215-895-2705.