Where Is the Slack in the Labor Market?

A recent Economic Synopses essay looked into the cause of the slack in the labor market.

Carlos Garriga, research officer and economist with the St. Louis Fed, noted that there is a wide range of economic indicators for measuring slack in the labor market, with the unemployment rate being perhaps the most common. During her March press conference, Federal Reserve Chair Janet Yellen cited nine different indicators to argue that considerable slack remains in the labor market.

Garriga focused on aggregate nonfarm payroll hours for insight into current sources of slack.¹ He found that three sectors—construction, manufacturing and information—have yet to fully recover from the recession, while all others have fully recovered or even surpassed their prerecession levels.²

Garriga noted that the decline in the manufacturing sector is particularly significant as it represents around 20 percent of gross output. The decline in the information sector is substantially less relevant to the overall economy because it represents only 5 percent of gross output and 2 percent of aggregate hours.

However, both sectors were already in a secular downward trend when the Great Recession occurred, with aggregate hours dropping around 20 percent for each sector from the first quarter of 2000 through the fourth quarter of 2007. The construction sector, on the other hand, had experienced a long upward trend leading up to the recession. Hours worked in construction fell far below trend during the recession and have not yet recovered, while hours worked in manufacturing and information have nearly recovered to their prerecession downward trend levels.

Garriga concluded, “Despite the underperforming sectors, total hours worked for all sectors have nearly recovered to pre-Great Recession levels. Growth in other sectors has offset much of the decline. If there is some slack in the labor market, it is likely attributable to the performance of the construction sector and related activities.”

Notes and References

¹ This measure reports hours worked at the aggregate level and in different sectors of the economy, allowing for comparison of performance across sectors and time periods. For example, if a firm needs 40 hours’ worth of labor input to complete a task, it can use multiple combinations of workers to supply those hours. This measure captures changes in the desired total number of hours, but not how the firm allocated its resources to accomplish the task.

² See Garriga’s Economic Synopses for how the other sectors have fared during and after the recession.

Additional Resources

• Economic Synopses: Where Is the Slack in the Labor Market?
• On the Economy: The Economic Recovery with Malfunctioning Sectors
• On the Economy: The Recession’s Effect on Job Churn