Instead of the unemployment rate, the Janet Yellen-led Fed said that it would “assess progress” toward full employment and stable prices, taking into account “a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments.”
What specific information the Fed will take into account in assessing those three factors, it hasn’t said.
But regarding the first one, the labor market, Yellen identified in her press conference five indicators she will look at – her “dashboard” of information. “The dial on virtually all of those things is moving in the direction of improvement,” Yellen said.
1. The “U-6” unemployment rate: The unemployment rate most often referenced in the media is just one, the U-3 rate, of several published by the Bureau of Labor Statistics. It simply counts the number of unemployment workers as a percentage of the labor force. That rate is currently 6.7 percent.
The BLS also publishes another measure, the U-6, which takes into account not only the unemployed, but also people “marginally attached to the labor force” – meaning they want a job but aren’t currently looking for work, discouraged workers, and people who want full-time work but have had to settle for part time. U-6 unemployment is 12.6 percent, but it has been falling.
2. Long-term unemployment:“The share of long-term unemployment has been immensely high and can be very stubborn in bringing down,” Yellen said.
Long-term unemployment, defined as the share of the jobless who have been out of work for more than 26 weeks, peaked at nearly half of all unemployment in 2010. It has since declined to 35 percent, but it’s still historically and disproportionately high. In fact, short-term unemployment is near normal levels – the big unemployment right now is the number of long-term jobless.
3. Labor force participation:The labor force participation rate includes all Americans who have or want a job. It doesn’t include children, retirees, students, the disabled and prisoners.
The labor force participation rate has plummeted over the course of the recession, to lows not seen since the late 1970s. How much of that decline is a product of the weak economy and workers giving up the job hunt versus the retiring of the baby boomers and other secular trends is an open question among economists.
“I do think most research suggests that due to demographic factors, labor force participation will be coming down, and there has been a downward trend now for a number of years,” Yellen said.
“But I think there is also a cyclical component in the fact that labor force participation is depressed, and so it may be that as the economy begins to strengthen, we could see labor force participation flatten out for a time, as discouraged workers start moving back into the labor market."
The rate has been falling steadily over the past five years, but has leveled out slightly in the past few months – a fact Yellen was quick to trumpet:
4. Quits:Yellen said that quits were a useful gauge of labor market turnover: “I take the quit rate in many ways as a sign of the health of the economy. When workers are scared they won't be able to get other jobs, they show a reduced willingness to quit their jobs.”
The BLS produces the Job Opening and Labor Turnover Survey, which includes statistics on labor market churn, including quits. The quits rate has been steadily rising, but remains well below a healthy level.
Furthermore, as Yellen noted, hiring remains significantly depressed.
5. Wage growth: Wage growth would be expected to pick up if the labor market were tightening.
Yellen said that “3 and 4 percent wage inflation would be normal.”
Wage growth is hard to capture in just one number, but it’s been running at close to 2 percent, not adjusted for inflation. Two main measures produced by the BLS, hourly earnings and total compensation (including benefits), show the course of workers’ earnings over the recession.
“So not only is it depressed, signaling weakness in the labor market,” Yellen noted, “but it is certainly not flashing — an increase in it might signal some tightening or meaningful pressures on inflation, at least over time, and I would say we're not seeing that.”
Although Yellen said these five measures are improving, it’s clear that each one of them is well below normal levels, suggesting that she sees the labor market as far from healthy.
Yellen was also dismissive of one line of thinking that yields the conclusion that labor markets are relatively tight: namely, the suggestion that short-term unemployment is more important than long-term unemployment in driving inflation.
In February, economists at the Federal Reserve bank of new york produced research indicating that the short-term unemployment rate is more predictive of trends in wage growth and inflation than the overall unemployment rate.
That could be an important note, given that the number of workers unemployed for less than 27 weeks is nearly back to pre-recession levels:
Yellen said that she has seen the research, but added that "it would be tremendously premature to adopt any notion that says that that is an accurate read on either how inflation is determined or what constitutes slack in the labor market.”
Her comments about which labor market indicators she watches makes one thing clear: She thinks the labor market is improving, but still far from healthy and even further from overheating. That, in turn, indicates that she’s not feeling pressure to tighten monetary conditions because of the job market.