It has been decades since the annual U.S. unemployment rate was under 4%. The rate was 3.6% in 1968 and 3.8% the year before. It almost made it in 2000 when the rate was 4.0% on the nose. The rate has started to head back in that direction. It hit 4.3% in May. Another few tenths of a percent down may be impossible.
Among the theories about full employment is that it actually starts when the rate drops below 5%. Some portion of the work force is between full-time jobs. Some people have temporarily left the work force. These few hundred thousand people are actually not unemployed in the classic sense, but they are as the government measures them. An already tight jobs market would need to get much tighter to drive the rate down further.
Perhaps the largest hurdle to a less than 4% national unemployment rate is the large pockets of the nation where the rate is well above the threshold. In several big cities, the rate is still high. This includes Chicago, the country’s third largest city, at 4.9%, Houston at 5.3% and Cleveland at 6.4%. Another 40 cities have rates above 5%. As long as pockets like these remain, it will be difficult for the national rate to dip much lower.
Another factor in whether the unemployment rate can fall much further is the efficiency of corporate expense controls. Since the Great Recession, many companies have replaced full-time workers with part-time employees. This allows for a flexible work force, and it eliminates the need for expensive benefits in many cases. What corporate America has learned about this kind of cost control will not be unlearned.
Finally, the U.S. economy is in the midst of growth that is barely mediocre. At some point that has to catch up to job creation. Gross domestic product for 2017 is not expected to be much better than a 2% increase. While that is a large rebound from the recession, it still trails most big, developed countries. U.S. job creation may run out of steam because the overall economy cannot support it.
A jobless rate below 4%? Not likely.