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July 12, 2010

A new full employment rate

The definition of full U.S. employment has changed. It used to be associated with an unemployment rate of 5 percent. Then in the early 2000s, this was revised downward when unemployment fell below 4 percent. Where do economists think the full employment unemployment rate is today?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"What are we talking about here? Well, we are talking about an unemployment rate that is consistent with everyone who wants a job being able to get a job given the skills that they have. Or another way of looking at it is an unemployment rate that is consistent with the economy producing as much as it can at any point in time.

"And you are exactly right. When we were in school it was commonly thought that it was about 5 percent. In the 1990s and 2000s it went down to 4 percent. And now economists are looking at that again, and with our very, very high unemployment rate that has resulted as this recession, we are saying, 'Well, is it realistic to think that we could get down to 5 percent or 4 percent unemployment any time soon?'

"And some economists are saying no. They are saying that two things will impede this: One is that the set of skills that a lot of folks have -- the kinds of training they have -- are not consistent with the kinds of jobs that are going to be opening. So these folks are going to stay perpetually unemployed.

"And secondly the problems in the housing market have made it very difficult for a lot of folks to be able to sell their home and leave a region where, for example, unemployment is high to move to a region where unemployment is low. People aren't able to do that as well as they used to, and that is going to keep the full employment unemployment rate high.

"So what do economists think we could get down to? Well, the current thinking is maybe 6.5 to 7.5 percent unemployment is about as low as we can get in the near term."

Posted by deeshore at July 12, 2010 08:54 AM