The Big Idea
Looking for labor market slack
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Economists are constantly trying to gauge slack in the labor market. When the unemployment rate reached 4.6% in November and appeared to be on a clear uptrend, Fed policymakers responded with rate cuts at three straight meetings. The subsequent decline in the unemployment rate in December and January has brought it back to 4.3%, close to FOMC estimates of the long-run full-employment level. With no clear sign of slack from joblessness, economists can turn to other margins of labor market behavior such as the U-6 underemployment rate and labor force participation. Both suggest the labor market is close to full employment.
Margins of labor market slack
The most obvious way to gauge weakness in labor market conditions is the level of the unemployment rate. Economists can debate what reading of joblessness is consistent with full employment, but there is fairly broad agreement. For example, the median projection of 19 FOMC participants puts the long-run equilibrium level of the unemployment rate is 4.2%, and the central tendency, which drops the three highest and lowest individual submissions, is a relatively narrow range of 4.0% to 4.3%.
In the first half of 2025, the unemployment rate was squarely in that range, but it backed up noticeably late last year. Fed officials became quite worried about downside risks to the labor market when the jobless rate rose to a high of 4.6% in November, although that reading has since been revised to 4.5%. Through December and in January, the rate fell to 4.3%.
However, there may be slack in the labor market beyond unemployment. One measure that gained prominence in the 2010s was involuntary part-time employment. Then Fed Chair Yellen highlighted the broader U-6 underemployment rate, which also includes those in the household survey who say that they are only working part-time but want to have full-time employment. Back in the mid-2010s, an elevated pool of people who were unable to attain full-time hours pointed to some lingering slack in the labor market even as the unemployment rate fell to around the FOMC’s estimate of full employment.
In the current situation, the U-6 underemployment rate fell sharply in January to 8.0%. That puts the gap between the traditional (U-3) unemployment rate and the U-6 gauge roughly in line with previous instances when the jobless rate was at roughly the current level (Exhibit 1). The current gap of 3.7 percentage points is about where it was in 2007 and in 2018 and 2019. By contrast, the gap in 2015 was over 5 percentage points. This suggests that the level of involuntary part-time workers is about where we would expect and thus does not point to an alternative source of excess slack.
Exhibit 1: U-3 vs. U-6 Unemployment
Source: BLS.
The other main potential source of slack is labor force participation. People are only designated as unemployed in the household survey if they are out of work and actively seeking a job during the month. If respondents want to work but fail to pursue a job over the course of the month, perhaps because they do not believe there are any good opportunities—so-called “discouraged workers”—they show up in the household survey as out of the labor force and thus not unemployed.
If the labor force participation rate (LFPR) is lower than would normally be associated with a given unemployment rate, it might point to slack in the labor market.
Assessing labor force participation is not as straightforward as simply examining the overall LFPR. The U.S. population is aging, which means that a rising proportion of the “working-age population”—defined by the BLS as 16 and up, meaning no upper limit—is over 65, the traditional retirement age. As a result, the overall LFPR is trending lower over time.
The most straightforward way to adjust for shifting demographics is to focus on the prime-age LFPR, covering ages 25 to 54 (Exhibit 2). The prime-age LFPR has been trending higher since the pandemic, even as the pace of job gains has cooled. In January 2026, the gauge exceeded 84% for the first time since 2001.
Exhibit 2: Prime-age labor force participation rate
Source: BLS.
The lofty level of the prime-age LFPR clearly indicates that there is not an outsized reservoir of idle workers who are waiting for improved job prospects to jump back into the labor force. Instead, this measure also points to a labor market that is at worst near full employment and perhaps even marginally tight.
Signs of stabilization
The improvement in labor market data over the past few months extends beyond just the decline in the unemployment rate in December and January. Two other key measures of the health of the labor market from the household survey also confirm that the economy is near or at full employment. The improved tone of the data helps to explain the notable swing in Fed rhetoric, from emphasizing downside risks to the labor market and cutting rates in late 2025 to being firmly on hold and citing “signs of stabilization” in labor market conditions in early 2026.
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