The U.S. unemployment rate is hovering around a 16-year low. Job openings are near a record high. So why is it possible to argue that the economy is not at full employment? One potential answer: There are still plenty of people who would work if only they could find a job that paid enough.
A new survey from the Federal Reserve Bank of New York sheds valuable light on the “reservation wage,” the lowest level of pay at which someone will accept a new job. It shows that the threshold has fallen over the past nine months – a period during which a lot of people not typically counted in the unemployment rate have actually taken jobs, driving up the employed share of the population.
This strongly suggests that pay is playing a significant role in determining whether people choose to work, and that more workers are available at the right price – evidence of what economists would call “slack” in the labor market. But I’d say slack is the wrong term. What’s really going on is a standoff between employers and potential workers. This is where the reservation wage comes in.
Employers have lots of job openings and complain endlessly about how hard it is to find qualified workers. Meanwhile, the biggest pool of available workers is technically out of the labor market, meaning they aren’t actively looking for work (and hence aren’t counted as unemployed). Coaxing them back in requires offering a desirable job at an attractive wage. Yet employers so far have been reluctant to raise wages beyond a modest amount.
Perhaps the decline in reservation wages represents a thaw in this standoff. If so, it’s good news for the economy. If the employment-to-population ratio for workers aged 25 to 54 – a key measure of slack – got back to its 2007 peak, that would be an additional 2 million people working. Such job growth would create its own positive feedback, because employed people – particularly those in their prime working years – tend to buy cars and houses and pay others to take care of their kids.
If workers give a little, employers might do the same. Suppose white-collar professionals decide they’re willing to come off the sidelines at an annual wage of $55,000 instead of $60,000. As all the new white-collar workers start dining out more, maybe restaurant owners will raise hourly wages for dishwashers to $14 from $12 to help meet the added demand.
Granted, some might argue that the decline in the reservation wage is a bad sign, reflecting newfound pessimism on the part of workers. But data on consumer confidence from the Conference Board suggest otherwise: Since November, the percentage of workers reporting plentiful job opportunities has surged, and is now higher than at any point in the last cycle.
With help from Washington on either the immigration or the fiscal-stimulus front looking increasingly unlikely, it’s going to take something else to drive job growth. A new dynamic between employers and workers might be just the ticket.
Conor Sen is a Bloomberg View columnist.
