Could stagflation happen in the US?

Nadya Mihaylova - 14 June 2017

In the days when average annual inflation and the average unemployment rate were of similar magnitudes, someone dreamed up the misery index, the simple sum of the twin perils. At its peak in June 1980, the US misery index reached 22 per cent. Today, it stands at only 6.6 percent, using the headline CPI inflation rate of 2.2 per cent and the U3 unemployment rate of 4.4 percent of the labour force.  Superficially, the US economy is sitting pretty with both low inflation and unemployment rates. Surely, there is no risk of stagflation?

As usual, there is a catch. A 21st century misery index would capture the dimensions of under-employment – both quantitatively in terms of hours worked and qualitatively in terms of the utilisation of worker skills – and the shocking stagnation of median living standards over the past 20 years. On the first count, the relative condition of today’s labour market is less impressive on the wider measures of under-utilisation (figure 1).

The official concept of unemployment is distinct from inactivity, yet both constitute a supply-side drag on economic output. While all six definitions of unemployment move together, the broadest measure of idle labour resource, the U6 rate, remains above 8 per cent and, most probably, well above a typical 1960s or 1970s average. This measure embraces involuntary part-time workers, as well as those who are unemployed but had not searched for a job four weeks prior to the survey either because no jobs were available (discouraged) or for any other reason (marginally attached). In contrast, the official rate concentrates on those actively seeking a job at the time of the monthly survey.

While U4 and U5 track the official unemployment figure, the gap between U5 and U6, which captures involuntary part-time workers, is considerably wider. For as long as this scale of underemployment exists, there will be reservations about the tightness of the labour market, even if conditions appear benign using the more conventional indicators. In addition, the labour force participation rate has declined in the last two decades from its highest point of 67 per cent to 63 per cent today due to the increasing density of those neither in work nor looking for work. As baby-boomers move into retirement, slowing demographic growth has been a leading contributor to this negative trend. 

The second added dimension of ‘misery’ is the extent to which employees fail to participate fully in the real income gains that are measured by GDP growth. The growth rates of the real average hourly earnings for production and nonsupervisory employees and the weekly wage bill have consistently lagged real output growth. The shortfall for the wage bill is reflective falling labour income shares, but the shortfall in real hourly earnings gives a keener sense of the way a typical worker’s income has fallen behind. The increase in industrial concentration and the disintegration of wage bargaining in the US offer two broad explanations. The number of new entrants has decreased because, perversely, regulation has given a bigger competitive advantage to the bigger players. Greater monopoly power confers more control over worker remuneration and lessens the commitment to capital deepening and investment in innovation.

When we combine the prospective rise in inflation with the stagnation of living standards and the stubbornly high rate of broad unemployment, then stagflation doesn’t seem that far-fetched.

Figure 1



Persons Unemployed 15 weeks or longer, as a percent of the civilian labor force, Percent, Monthly, Seasonally Adjusted


Unemployment Rate: Job Losers, Percent, Monthly, Seasonally Adjusted


Civilian Unemployment Rate, Percent, Monthly, Seasonally Adjusted


Special Unemployment Rate: Unemployed and Discouraged Workers, Percent, Monthly, Seasonally Adjusted


Special Unemployment Rate: Unemployed and Marginally Attached Workers, Percent, Monthly, Seasonally Adjusted


Total unemployed, plus all marginally attached workers plus total employed part time for economic reasons, Percent, Monthly, Seasonally Adjusted

Data Source: U.S. Federal Reserve

Figure 2

Data Source: U.S. Federal Reserve


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