Full employment, as defined by the Congressional Budget Office (CBO), is the level of employment that stops short of creating inflationary pressures on wages.
The CBO pegs this at 5.2%. In contrast, February’s unemployment rate stands at 5.5%. The March unemployment number is due out Friday.
The Watson Wyatt analysis assumed that the number of people out of work peaked in January this year when the unemployment rate was 5.6%. In comparison, in the prior five recessions, the average unemployment rates peaked at 7.9%.
In addition, the labor force grew by an average rate of 1.7% in the year following each of those downturns, compared with an estimated labor force growth rate of just 0.8% this time around.
For a full employment at 5.2%, the US would need to see a pick-up in employment of just 1.2% to reach full employment in the coming year. If the recovering economy absorbs the 0.8% expected increase in the labor force and an additional 0.4% of unemployed workers, the unemployment rate would drop from the peak of 5.6% to 5.2%.
“A combination of relatively low unemployment during the downturn and historically low labor force growth projected for the coming year, means that we may quickly see a return to full employment,” says Sylvester Schieber, an economist and director of research at Watson Wyatt.