Labor Market Appears Tight
In the U.S., the V/U ratio was over 1.8 in the last quarter of 2021, which meant that there were nearly two vacancies for every unemployed worker. This was higher than its pre-pandemic level and higher than the recent historical norm of about 0.7 since 2000. Everyone seems to agree that the labor market is very tight.
But if the labor market is so tight, why are real wages not rising more rapidly? In fact, given recent inflation, real wages for many workers appear to be declining. At the same time, profit margins appear elevated. How is this consistent with a tight labor market?
There may be several reasons behind this phenomenon. For example, there is some anecdotal evidence suggesting that workers in the post-pandemic world are receiving higher compensation through nonpecuniary benefits, like more flexible work schedules.
Another possibility is that the conventional measure of available workers—the number of unemployed—is inadequate. In particular, many workers do not become unemployed before finding a new job. Instead, they make job-to-job transitions. To the extent that employed workers are competing for the available set of job vacancies, the labor market may be considerably less tight than what is implied by the V/U ratio. Indeed, we found this to be case.
Accounting for Employed Job Seekers
In the figure below, we plotted the conventional measure of labor market tightness, V/U (the blue line). We also plot an adjusted measure of labor market tightness, V/(U + E*J2J) (the dotted orange line). This adjusted measure includes a different calculation for available workers, U + E*J2J, in which E measures the level of employed workers and J2J measures the job-to-job transition rate in a given month; we calculated the transition rate from the Current Population Survey (CPS).