Is The U.S. At Full Employment?

| About: ProShares Inflation (RINF)

By Edward Lambert

This is a common question. It is important to know if an economy is at full employment. However, the question is wrong. Or at least the way it is answered is wrong…

Full employment is based on employment of labor. However, full employment must consider both labor and capital since they are both resources for production. You might see a situation where capital reaches full employment before labor. Actually, that is what I always see. Then labor becomes more fully employed as capital stops being employed. That is a normal process for a business cycle.

So is the US at full employment? As I see it, the economy reached full employment in the second half of 2014, when capital utilization was optimized.

The bottom line in the graph is the optimization of capital in the economy. When the line reaches zero, a resource is optimized for profits.

The top line is the optimization of labor. The graph shows that capital is always optimized, but labor never is. So in essence, capital always reaches full employment but labor does not.

Still, labor and capital need to be taken together to see full employment. The economy has reached full employment considering labor and capital, but employment of labor can still increase even after full employment of capital. The economy is on the other side of full employment going through a subtle cascading process into a contraction.