One of the recent quandaries in economic analysis relates to why the seemingly tight US job market hasn’t triggered higher increases in wage and price inflation.  

After all, the unemployment rate in March was only 3.8%, and annual wage increases were quite low, 3.2% year over year.

In other words, the coexistence of record-low unemployment with unusually weak wage and price inflation continues to be a source of considerable consternation among economists and policy makers.

This writer has always thought that the Phillips curve concept, the trade off relationship between wage inflation and the level of unemployment, was unstable because of inflationary expectations shifts over time.

Moreover, economists have always known that the ordinary unemployment rate, which is calculated from a survey of American households, is an imperfect barometer of the tightness of the labour market. There have always been other proxy variables, such as the voluntary quit rate or broader definitions of unemployment (for e.g. the US U6 unemployment rate), which can also reflect the tightness of the job market,

Among one of the more obvious problems with the unemployment rate measure is that it does not accurately account for those workers who are so discouraged that they temporarily or permanently drop out of the labour force.

In a recent article, “Labor market not overly tight, demographically adjusted measure shows” (Economic Letter, Federal Reserve Bank of Dallas, December 2018), Carlos Zarazaga and Emil Mihaylov reviewed whether a labor input utilization rate (LIUR) measure was a better indicator of the tightness of the job market.

Here is the description of this measure.

“The LIUR is the proportion of total hours individuals devote to work. It is calculated as the total number of hours that the working-age population was actually at work relative to discretionary hours—100 hours a week on average per working-age individual—that the population could have devoted to work.”

There are some intriguing insights stemming from this new measure, though this writer also believes that labour turnover also provide valuable information with respect to the tightness of the job market.

When the economists reviewed the track record of this new measure, they concluded that there was no clear tendency for the LIUR to increase or decrease before the 2008 Great Recession. However, over the decade following the end of the Great Recession, the aggregate LIUR remained 3.4% lower than its pre-recession LIUR average.

The authors felt that the demographic impact of baby boomers retiring may have explained some of the significant differences, and thus adjusted the indicator to reflect demographic groups based on age and gender. In other words, they also created a demographically adjusted LIUR.

In the authors view the puzzle about the absence of post-Recession inflation disappears when the LIUR replaces the unemployment rate as a measure of labour market slack.

Indeed, two demographically adjusted versions of LIUR seem to suggest that U.S. labour market conditions were not overly tight in second quarter 2018, an assessment which is consistent with the relatively low wage and price inflation rates.