Editor's Note: Next stop wage inflation? That's Hedgeye U.S. Macro analyst Christian Drake's pre-Jobs Report reading on the labor market from today's Early Look. Below is a brief excerpt.
You’ll hear economists talk about the U6-U3 spread as a measure of labor slack. The U3 Unemployment rate is the benchmark measure and the one you hear quoted every month. The U6 Unemployment rate adds on discouraged and marginally attached workers as well as those who are part-time but would rather be full-time.
Late in an expansion when the economy is reaching full employment and the unemployment rate (U3) has troughed at some low level (like it has over the last year+), it becomes increasingly likely that unemployment has hit its “natural rate” floor.
If the U3 rate is at its lower bound, the spread between the U3 and the U6 rate becomes a reasonable proxy for remaining cyclical slack in the labor market. That spread has moved below its long-term average in the last couple months and, as the Chart of the Day below shows, sits at a point, historically, where wage inflation begins to hook up.
