Full Employment? The Economy Isn't Acting Like It

Low levels of joblessness have historically preceded catastrophe. But maybe not this time.

- Geoff Colvin

ECONOMY WHEN UNEMPLOYMENT fell to 3.7% in September, the lowest in almost 50 years, it was hard to know whether to cheer or tremble. A white-hot labor market means it’s easy to get a healthy raise, which many workers could certainly use. Booyah! Except that whenever unemployment has fallen anywhere near this low in the past 60 years, a recession has inevitably followed, often very quickly, and inflation has usually surged. No bueno.

All of which leads to a large question that turns out to be profound: Why is neither the good stuff nor the bad stuff happening? Pay isn’t rocketing; the economy is booming, with no incipient recession apparent in at least the next few quarters; inflation remains subdued.

The explanation is that an unemployment rate of 3.7%, which long signaled a job market as tight as a drumhead, just isn’t as low as it used to be. “The 3.7% rate overstates the true strength of the labor market,” says Peter Ireland, a Boston College economics professor and former Fed researcher. “Things are good but not that good.” The reasons for this shift will have implications for the economy in several ways for years to come.