The state of the job market

In the NY Times, Greg Mankiw offers a pretty balanced assessment of the current macro state of the U.S. labor market and its implications for monetary policy. For the most part, things still look pretty bad, but there are some hints of upward movement in wages and a rising rate of job vacancies that could signal, especially to inflation hawks, that the Fed should ease its foot off the accelerator. Dean Baker provides useful notes of skepticism.

The vacancy rate is an interesting series, providing a demand-side indicator of market tightness to complement the unemployment rate on the worker side. Unfortunately, the modern vacancy series only goes back to 2001. Here it is, displayed with the unemployment rate and employment-population ratio:

The vacancy and unemployment rates can be combined into the vacancy-unemployment (v/u) ratio, which has the common-sense interpretation of measuring the ratio of job openings to workers looking for them. It should be procyclical. In the following diagram, I plot v/u and an alternative index using one minus the employment-population ratio in the denominator:

The recovery since the bottom of the crisis is pretty clear, but by this measure of tightness, the labor market has a long way to go before it returns to its pre-crisis conditions, let alone the state it was in as of early 2001. Of course, it's possible that the labor market was "overheated" on the eve of the financial meltdown, and maybe we would prefer not to go there. But there's not a whole lot of evidence that wage inflation was accelerating in 2006-2007, as the following chart with the annualized rate of change in average hourly earnings suggests:

P.S.: You too can have fun with FRED!