Surplus Labor at Record Low Level Coming Off Recession

-The amount of "surplus labor" available as the economy recovers is at the lowest level it has ever been over the past ten recessions.
The amount of "surplus labor" available as the economy recovers is at the lowest level it has ever been over the past ten recessions, according to a new Watson Wyatt analysis.

Surplus labor is defined as the number of unemployed workers above a 4 percent unemployment rate (which is generally considered the "full employment" mark) plus new entrants to the workforce (such as recent college graduates) available over the 24 months following the low point of a recession.

"Any way you look at things, we are facing extremely tight job markets once the economy picks up steam," said Sylvester Schieber, Ph.D., director of research as Watson Wyatt.

Roughly 2.9 million Americans were unemployed in February 2002, which the analysis assumed to be the low point of the current economic downturn (Figure 1). That number is well below the number of unemployed during recent recessions - for example, 7.5 million were unemployed at the low point of the 1982 recession, and 3.5 million were unemployed in the 1990 downturn.

But given that the size of the workforce has grown steadily over the years, the current number of unemployed looks even more modest relative to the overall size of the workforce. The unemployment rate above the 4 percent full-employment mark was just 2.0 percent in February 2002, compared with 2.8 percent in 1990 and 6.8 percent in 1982 (Figure 2).

But the gap grew even wider when Watson Wyatt factored in potential new entrants into the workforce in the 24 months following the low point of each downturn. Looked at this way, the amount of surplus labor stands at just 3.7 percent this time around, compared with 4.7 percent in 1990 and 9.6 percent in 1982 (Figure 3).

"There is very little slack in the system," said Schieber. "When the economy heats up, that slack will be taken up quickly, and we will be right back to tight labor markets.

"It´s hard for companies to look out at the horizon when they are still digging out from the downturn. But the coming decade may make the talent wars of the 1990s look like the ´good old days.´ "

Watson Wyatt & Company, the primary subsidiary of Watson Wyatt & Company Holdings (NYSE: WW), is an international human capital consulting firm that provides services in the areas of employee benefits, human resources technologies and human capital strategies. The firm is headquartered in Washington, D.C., and has more than 4,200 associates in 61 offices in the Americas and Asia-Pacific. Together with Watson Wyatt LLP, a leading European-based consulting partnership, the firm operates globally as Watson Wyatt Worldwide. Watson Wyatt Worldwide has more than 6,300 associates in 88 offices in 30 countries.

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