But Is It Real?

Trying to understand the true health of the labor market is not an exact science. Instead, it is an exercise in inferential statistics. This discipline is a tool that helps the Bureau of Labor Statistics define characteristics about the large labor population without needing to poll the entire cohort. But recently there has been a lot of criticism about one of the most recognized economic data points, the unemployment rate.

The rate’s validity may be questioned due to some unusual behavior in the labor market: a persistent decrease in the labor participation rate, defined as the number of employed plus unemployed Americans divided by the total population. Missing from this count are those who could be working but are no longer trying to get a job for one reason or another. In other words, a increasingly smaller percentage of Americans consider themselves to be part of the work force. This leads some to question the improving unemployment statistic.

There are policy implications at stake. The nation’s employment health is part of the Federal Reserve’s dual mandate. The central bank has even targeted a 6.5 percent unemployment rate as its goal (September’s rate was 7.2 percent). But if there is an artificial decline happening because of the participation rate, what is a central banker to do? Those that endorse the unconventional monetary policies currently being used worry that the tactics will be removed too soon based on possibly tainted information.

The Federal Reserve Bank of San Francisco has tried to address this problem by looking for other measures of labor market improvement. They analyzed 30 indicators and found six that have some predictive qualities. These indicators come from various sources like the Conference Board, Institute of Supply Management, and the Department of Labor. Their research suggests the labor market is improving and has more momentum now that just a year earlier; they go so far as to conclude that the improvement could accelerate in the coming months. Perhaps this rationale would help justify the end of experimental monetary policy in the near future. Of course, Congress may throw a wrench in the plan if they cannot get their act together in the months ahead. (by C. Cox)