The concept of full employment, and what it means for wages, explained

The unemployment rate ticked down to a nine year low of 6.2 per cent in August, approaching what economists refer to as “full employment.”

So what is full employment? It’s the lowest rate of unemployment before a scarcity of job seekers starts to inflate wages and hit the economy.

Economists disagree on exactly what that unemployment rate is, but Maurice Mazerolle at Ryerson University’s Ted Rogers School of Management says it’s somewhere between five and six per cent.

“When you start pushing it down below six per cent, this is when you start seeing lots of job openings…there’s lot’s of turnover, lot of movement, people are finding it hard to hold on to employees because they’ve got other options,” he said.

“So if you don’t raise wages, you’ll have this constant churning. In order to retain labour, people start putting a premium on wages in order to have people stay.”

Employees would no doubt welcome the rise in wages, but for those managing the economy, the concern is that the trend will lead to accelerating inflation in the economy as a whole.

“If you push unemployment too low, or below what is deemed a normal rate in the case of the full rate, then you start to put inflationary pressures on different parts of the economy,” said Mazerolle.

“So the idea is you want the economy churning along at a non-inflationary rate of unemployment.”

The latest job numbers show nine months of dropping unemployment rates, the longest streak since before the financial crisis, but Mazerolle said wages have been slow to respond.

“Lately, because wage growth is so slow, we really haven’t seen a lot of inflation in the market. Even though prices are going up, wages haven’t been, and that’s because the unemployment rate has been at a level whereby there’s been no real need to raise wages, because there hasn’t been that much difficulty in hiring.”

That is finally starting to change as the unemployment rate steadily drops, with Statistics Canada reporting that compared to a year earlier, average hourly wages expanded at a faster rate than inflation to reach 1.8 per cent.

But tempering a rise in wages is the fact that many of the jobs created recently are part-time, meaning some people at least are still looking for steadier work.

The main unemployment rate also hides the number of people who have given up looking for work. That number is reflected in the participation rate, which shows the percentage of the population who either have, or are looking for, a job. Statistics Canada said the participation rate improved 0.2 per cent in August compared to the year before to 65.7 per cent, but it’s still down from the high of 67.6 per cent in 2007.

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