Full Employment? Ask Young Workers

By Nicholas Colas of DataTrek Research

The $64 question for the US labor market is how close are we to full employment in a post-pandemic world? One way we can assess this topic is by looking at the current employment status of younger Americans. This cohort was disproportionately hurt after the Financial Crisis, particularly when it came to underemployment. It took a hot labor market and years of economic growth to incorporate them into the labor force and into positions that matched their skill levels. Did the Pandemic Recession cause the same problem all over again, or are we in a better spot now?

#1: Here’s how young workers with and without a college degree are faring relative to prior cycles using data from the New York Fed (rates calculated as a 12-month moving average back to 1990):

• The unemployment rate for recent college graduates (aged 22 to 27) with a bachelor’s degree or higher fell to 5.4 percent in September 2021 (latest available data) from a high of 13.3 pct in June 2020 during the pandemic. The lows of the last 3 economic cycles were 3.5 pct (November 2019), 3.0 pct (May 2007) and 3.7 pct (November 2000). Average: 3.4 pct, or 2 percentage points below the current rate.

• The unemployment rate for all college grads (aged 22 to 65) was 2.9 pct as of September versus a high of 8.0 pct in June 2020. The lows of the last 3 cycles were 2.0 pct (January 2020), 2.0 pct (March 2007) and 1.7 pct (December 2000). Average: 1.9 pct, down 1 percentage point from the current rate.

• The unemployment rate of young workers without a bachelor’s degree (aged 22 to 27) was 8.8 pct in September 2021 versus a high of 21.5 pct in June 2020. The lows of the last 3 cycles were 5.8 pct (June 2019), 7.4 pct (May 2007) and 6.0 pct (October 2000). Average: 6.4 pct, or down 2.4 percentage points from the current rate

Takeaway: each cohort’s unemployment rate has improved much more quickly than after the Great Recession. Young workers without higher education have the furthest to go to reach their lowest average unemployment rate of the last 3 cycles, followed by recent college grads and all college grads. Young workers without a college degree always take the longest to get pulled back into the labor force after recession given that doing so requires an especially strong economy.

#2: Underemployment (“the share of graduates working in jobs that typically do not require a college degree”):

• The underemployment rate of all college grads was 33.0 pct as of September. The lows of the prior 3 economic cycles were: 33.4 pct (December 2019), 33.2 pct (August 2008) and 31.4 pct (June 2000). Average: 32.7 pct

• The underemployment rate of recent college grads was 41.0 pct in September 2021. The lows of the past 3 cycles were: 40.2 pct (September 2018), 40.6 pct (January 2008) and 36.6 pct (April 2001). Average: 39.1 pct.

Takeaway: the underemployment rates of college grads and recent college grads are much lower than the last recovery. Both are currently just above their lowest average underemployment rates of the last three cycles. By contrast, they took much longer to improve after the Dot Com Bubble and Financial Crisis, particularly in the case of recent college grads.

Here are our three takeaways from this data:

1. Unemployment among recent college grads and younger workers without a college degree continues to fall at a brisk clip, but they are not yet at the point of full employment as compared to the prior three cycles. The unemployment rate for recent college grads is currently around levels reached in 2014/early 2015 after the Financial Crisis, and 2016 in the case of younger workers without a degree. Again, much better than the last cycle, but still room for improvement relative to three decades of history. While that likely means overall full employment is still a way off, it does give employers a couple of pools of talent from which to hire amid labor shortages and near-record high levels of job openings. Whether that helps the US labor market bridge the gap of still 4.2 million jobs missing since before the pandemic will come down to two considerations: 1) both recent grads and younger workers without higher education lack experience, so employers will need to be willing to invest in training, and 2) employers may need to loosen their job requirements of having a college degree.

2. Recent grads are much less likely to be underemployed than after the Financial Crisis, which yields two major positives on the consumer spending front: 1) adequate employment relative to young workers’ higher education level should mean they have more discretionary income, and 2) they should be less delayed with purchasing a home, having kids and all the purchases that come with those life milestones. This should help US economic growth, and in turn, the pace of further hiring.

3. A faster labor market recovery for young workers should help overall productivity. Many younger workers missed out on formative first real job experiences after the Great Recession, so the sooner they train now the more effective they will be for companies and the greater economy.

Bottom line: while unemployment among younger workers still exceeds the best levels of prior cycles, its rapid progress shows the US economy is getting closer to full employment more quickly than initially anticipated. Additionally, this is nothing like the environment after the last crisis when young college educated workers had to take jobs that did not leverage their education. They are entering a labor market hungry for workers, affording them the ability to find suitable jobs and pay which should in turn provide a boost to both US economic growth and productivity for years to come.