Current Quit Rate Consistent with 7.7% unemployment

March 6, 2014

Lately we’ve been seeing the argument made that the labor market is tighter than it looks. The argument goes like this: while the decline in the unemployment rate may have been boosted by labor force withdrawal, many of the dropouts will never work again, so it’s wrong to adjust the official jobless rate, either statistically or mentally, to compensate for depressed participation rates. So January’s 6.6% unemployment rate, 0.1 point above the Fed’s long-standing trigger, is getting close to “full employment,” and it would be prudent to start thinking about raising the fed funds rate sooner than most market participants expect. Is there anything to this?

We think not. For one, a 6.6% rate is about two-thirds of a standard deviation above the 1948–2007 average of 5.6%, which is not trivial. It’s even further above, in absolute terms, its 2002–2007 average of 5.3%, an expansion that was far from robust. It may be close to the Congressional Budget Office’s estimate of the “natural” rate of 6.0%, but as we showed last month, there’s nothing very scientific about these estimates; just six years ago, the CBO projected that the natural rate would be 4.8% right now.

A more subtle version of the argument looks at sectoral unemployment rates and finds some getting awfully close to full employment. We have a hard time seeing that. Graphed at right are unemployment rates by major sector compared to their 2000–2007 averages. In only one sector—manufacturing—is the January 2014 unemployment rate close to its average, though it’s 0.1 point above. Next closest is finance, 0.8 point above. The others are 1–2 percentage points above their average. A nice theory, but it just doesn't hold water.

Relatedly, some analysts are detecting wage pressures under a placid overall average—a 1.9% gain for the year ending in January. One argued that weakness in financial sector pay is dragging down the average. But if you do a weighted average of hourly wage growth excluding that sector, you still get 1.9%. Most major sectors, accounting for 72% of total private employment, exhibit wage growth below their 2007 average. In fact, wage growth is slower than it was a year ago—and that’s true of sectors accounting for 68% of private employment. It’s hard to see any tightness here either.

quit rates

Another place to look for signs of labor market tightness is in the quit rate. If workers perceive jobs as easy to get, they’re more likely to quit on their own. And, short of that, they’re more likely to demand raises from employers eager to keep them. But currently the quit rate is low by historical standards.

The BLS started publishing the quit rate in 2000. Since the quit rate tracks the number of those unemployed 5 weeks or less very closely, we used that series to estimate the quit rate going back to 1967. (Where the two series overlap, the fit is very tight—an r2 of 0.93.) December’s 1.7% rate is well below the full series’ 2.1% average. It’s also well below levels seen close to previous business cycle peaks, like 1979, 1989, 1999, and 2007.

The quit rate moves generally in line with the unemployment rate. You can “predict” the unemployment rate with decent accuracy with the quit rate, in fact. But as the graph on the bottom of this page shows, the unemployment rate associated with the December 2013 quit rate is a full point above its actual level. Or, putting it more bluntly, workers are acting as if December’s unemployment rate were 7.7%, not the 6.7% it actually was. If the job market were tighter than it looks, we’d expect a much higher quit rate.