Are jobs going to people who aren’t looking for them?

After a horrible decade or so, America’s unemployment rate is finally back down to around 4%, in the vicinity of what would normally be considered ‘full employment’. But is there still some slack in the US labour market? The Economic Policy Institute thinks so, and Josh Bivens at EPI has produced this graph to support their argument:

If the number of employed people rises, those extra workers can come from one of two places. Either the new workers were previously actively looking for a job, in which case they were “unemployed”, or they were out of work and not actively looking for a job, in which case they’re considered to have been “not in the labour force.” The EPI chart shows that in recent months, over 70% of newly employed people have come from the ranks of those who were not in the labour force – the people who were out of work, but not actively looking for a job. That’s the highest proportion on record, in a time series that goes back to 1990.

EPI’s interpretation is that this means that the unemployment rate is decreasingly useful as a measure of slack in the US economy, because there appears to be a large pool of people who are ready and willing to work, but who are not classified as ‘unemployed’ in the labour force statistics.

This led me to wonder: what would the same chart look like for Australia? Here’s the result:

Like in America, most newly employed people were previously not in the labour force. About 67% of newly employed Australians were not actively looking for a job before they got one. That’s about the average in Australia for the past couple of decades. You can see that the trend is pretty cyclical – in times when the labour market has run hot (2000, 2007, 2012), the share of new jobs going to people outside the labour market has risen. In economic slowdowns (2001, 2009-10, 2014-15), the ratio has fallen a bit. We’re now somewhere in the middle.

This is a useful reminder that, like any single statistic, the unemployment rate can’t capture everything that’s going on the in the labour market. As is often noted, it doesn’t take account of people in work who would like more hours (the ‘underemployed’), but it also doesn’t take into account those people who are out of the labour force but may be available to work.