As Much as a Third of Discouraged Workers Might Return

01-May (Wall Street Journal) — There is still plenty of room for improvement in the U.S. job market despite recent strides, according to a new working paper from the International Monetary Fund.

The debate over how much “slack” or unused capacity remains in the job market is crucial for Federal Reserve officials as they decide when to start raising short-term interest rates from near zero. If there is little slack, policy makers will want to raise rates soon to make sure the economy doesn’t overheat and cause inflation to take off. But if there still are many people available for work if offered, officials can wait longer before lifting borrowing costs.

The IMF paper suggests Fed officials can take their time.

“Labor market slack remains, although it has closed considerably over the course of the recovery,” write Ravi Balakrishnan, Mai Dao, Juan Solé and Jeremy Zook. “This slack goes beyond that signaled by the unemployment rate, and takes account of the labor force participation rate being below trend and many employees working part time involuntarily.”

The U.S. jobless rate was 5.5% in March, but a broader gauge of underemployment that includes workers who have part-time jobs but would like full-time work was 10.9%, the Labor Department reported.

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PG View: Certainly the Fed is no closer to its inflation objective. If they are not really close to their full-employment mandate either, there’s no reason for them to start tightening.