What’s on Janet Yellen’s Dashboard?
The Federal Reserve’s Federal Open Market Committee (FOMC) this week changed its “forward guidance” on monetary policy, dropping its 6.5 percent unemployment rate “threshold” for considering an increase in the federal funds target rate. Previously, the Fed had said that it would keep its key interest rate target near zero “at least as long as” the unemployment rate remained above 6.5 percent, then “well past the time” it declined below 6.5 percent. The unemployment rate is currently 6.7 percent.
Explaining the move, Chair Janet Yellen said that as the economy comes closer to achieving full employment, the FOMC will have a more finely balanced decision about when and by how much to raise the target for short-term interest rates. So what will the Fed, and Ms. Yellen, be looking at to assess labor market conditions? In her press conference, Ms. Yellen listed a “dashboard” of indicators that she watches to gauge the progress the labor market has made in its recovery from the Great Recession. We have represented those indicators in a series of six charts, so you can get a sense of the trends and lingering troubles Ms. Yellen has her eye on.
Click the charts for a bigger image
Those indicators include the standard unemployment rate as well as two other measures of unemployment—one broader and one narrower. The standard unemployment rate includes only those individuals who are unemployed and actively looking for a job. The U-6 unemployment rate includes individuals who are “marginally attached” to the workforce—they have not looked for a job recently but would like to work if given the
opportunity—as well as those employed only part time but who would prefer a full-time job. This wider measure of “underemployment” provides a sense of how much slack is in the labor force: Presumably, if the economy were to strengthen, marginally attached and part-time workers would be available to meet the increased demand for labor.
The figures on marginally attached workers, discouraged workers (a subcomponent of the
marginally attached) and those employed part-time for economic reasons are illustrated in our second and third charts. The still-high percent of “involuntary” part-time employment is one of the most striking aspects of the dashboard. It remains dramatically higher than before the recession.
The long-term unemployment rate is the percentage of the labor force that has been out of work for six months
or longer. While the short-term unemployment rate is near levels seen before the recession,
the long-term rate remains much higher. The Fed has been particularly concerned to see these workers get jobs before their skills erode and they find themselves out of the workforce permanently.
Ms. Yellen is looking for continued increases in the rates of hiring, job openings and “quits” reported in the Bureau of Labor Statistics’ Job Openings and Labor Turnover Survey. A rise in quitters signals a strengthening labor market.
Ms. Yellen also has her eye on the labor force participation rate. Historically, the participation rate has tended to fall when the economy is weak and rise when it is strong. That’s because when job prospects are bad, many people stop looking for work altogether, and when the economy improves, formerly discouraged workers rejoin the labor force. As Ms. Yellen noted in her press conference, there are important non-economic reasons why the participation rate has been heading downward over the last dozen years—especially the aging of the baby boomer generation. But the Fed is anticipating a cyclical rebound, or at least steadying, of the labor force participation rate.
Wages round out Ms. Yellen’s dashboard. Stronger wage gains suggest the labor market has improved enough that workers are confident in asking for higher wages, or alternatively that employers have to pay more to attract good workers. Stronger wage gains could also put upward pressure on inflation, which the Fed would actually welcome at this point. As our chart shows, wage rates haven’t risen much since the recession, but that was also the case long after the last recession, which was much less severe and shorter than the Great Recession.
You can download a full-page version of AIER’s Yellen Labor Market Dashboard here.