Is Iowa headed for 'full employment'?

Here's what Iowa's low unemployment rate means

Matthew Patane / The Gazette

Stock photo of hiring fair. (Liz Martin/The Gazette)
Stock photo of hiring fair. (Liz Martin/The Gazette)

Iowa’s unemployment rate is at a point it hasn’t seen since the early 2000s, sparking the possibility that the state is close to the lowest level reasonable.

In announcing the February unemployment rate, Iowa Workforce Development Director Beth Townsend said, “Iowa took another step toward full employment” with the drop to 3.2 percent.

But what exactly is “full employment”? Does hitting that benchmark mean all is well and good with Iowa’s labor force?

Here’s what some economists had to say.

What is full employment?

Full employment is the concept that a labor market, such as Iowa’s, has reached a point where everyone who is willing or able to work has found a job. At that stage, the supply of labor is so tight that wages are expected to start increasing.

“Full employment simply means that we are or we are close to utilizing as much of the ready labor — people ready, able, wanting and willing to work,” said Dave Swenson, an Iowa State University economist.

The unemployment rate dropping to a specific number doesn’t mean full employment has been reached, but it’s often used an indicator. Last month, Iowa Workforce Development said it considers full employment to be around three percent.

More people actively looking for work also needs to be taken into account, said Colin Gordon, senior research consultant with the Iowa Policy Project.

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“I would consider full employment more of a measure at which not only does the unemployment rate go down, but the labor force participation rate goes up and so do wages,” Gordon said.

Wage inflation rising above the unemployment rate also is a way to indicate full employment, said Cameron Hinds, regional chief investment officer for Wells Fargo Private Bank, in Lincoln, Neb.

“The last time that happened nationally was the time between 2006 and 2008, just prior to the recession,” Hinds said. “We’re not there today.”

Are we there yet?

No, but we might be close, some economists said. Iowa’s unemployment rate is low enough and employment is high enough to create a tight labor market.

“We are (close). There’s just not a lot of slack out there,” said Mike Lipsman, an economist with Strategic Economics Group in Des Moines.

Gordon, though, said Iowa still has plenty of people who aren’t participating in the labor market.

Iowa’s labor force participation rate was about 69.9 percent in 2016, down from 72.6 percent in 2008, according to data from the Economic Policy Institute.

“Until the discouraged workers come back into the labor force and those part-time workers get the hours they want ..., I don’t think you could call any number full employment,” Gordon said.

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It’s also important to note that the benefits of full employment seem to be constrained to Iowa’s major population centers, such as Cedar Rapids and Des Moines.

“Normally, you would think that with that level of low unemployment, the economy would be booming. It is in Des Moines (and other metros), but not in other areas of the state,” Lipsman said.

Why does this matter?

Full employment and a tighter labor supply can be a sign of a healthy economy. For qualified job seekers, it can be easier to find a position.

Employees may see higher wages.

“There is a direct correlation that, as the potential pool of new employees goes down, you have to increase wages to, in a relative sense, to attract people,” Hinds said.

For employers, though, it may make it more difficult to fill open positions.

“I’m not aware of a member company of whatever size — small or large, wherever they’re located, whatever industry they are in — I’m not aware of one that isn’t looking for people all the time,” said Mike Ralston, executive director of the Iowa Association of Business and Industry.

Are wages rising?

Possibly.

“I know that manufacturers, especially in rural Iowa, are raising wages because they need to,” Ralston said. “They need to to keep and attract and retain workers.”

The average hourly wage, adjusted for inflation, in Iowa rose 13 percent to $23.22 in 2016, up from $20.54 in 2007.

Much of that wage growth, Swenson said, is due to Iowa’s natural recovery since the recession. More recently, though, he said increases may be because companies need to offer more to attract the fewer workers in the state.

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“In recent quarters, we might see evidence that wages are improving because of labor supply,” Swenson said.

So, everything’s good?

Yes and no.

It’s true that Iowa has a lower unemployment rate, and lower is typically better.

“While we have variations across the state, for the most part the economy has grown ... and it looks like a strong, healthy and productive economy,” Swenson said.

There are still headwinds, though. They include an aging population, slow population growth and a hurting agriculture market.

Iowa also hasn’t seen growth in its labor force in the past year, meaning more people aren’t necessarily looking for work. The labor force fell by 8,700 people between February 2016 and February 2017.

“We are sort of in this ironic situation in the sense that we are near full employment, (but) we are not really attracting a lot of new people into Iowa or growing the labor force naturally and so we’re sort of pushing up against the limit of economic growth, it seems like,” Lipsman said.

Without new people entering the labor force, spending more money and having their incomes taxed, Iowa’s state tax revenues will be squeezed, he added.

l Comments: (319) 398-8366; matthew.patane@thegazette.com

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