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Tuesday, September 24, 2013

Labour Market Update

Gallup unemployment rate versus BLS unemployment

Just a small update on some recent developments in the U.S. labour market outlook. The spike in the Gallup daily unemployment rate now seems to be precisely that – a spike. It appears some extremely high values for a few days corrupted the data. That said, the payroll-to-population ratio from the Gallup survey is still not painting a bright picture, which is consistent with the stagnant employment-to-population ratio published by the BLS.

Gallup payroll to population ratio

William C. Dudley from the New York Fed pushed back slightly yesterday against the market tightening of recent months, questioning the relevance of the unemployment rate relative to other labour market indicators.

With respect to the first metric, we have seen labor market improvement since the program began last September. Over this time period, the unemployment rate has declined to 7.3 percent from 8.1 percent.   However, at the same time, this decline in the unemployment rate overstates the degree of improvement.  Other metrics of labor market conditions, such as the hiring, job-openings, job-finding rate, quits rate and the vacancy-to-unemployment ratio, collectively indicate a much more modest improvement in labor market conditions compared to that suggested by the decline in the unemployment rate.  In particular, it is still hard for those who are unemployed to find jobs.  Currently, there are three unemployed workers per job opening, as opposed to an average of two during the period from 2003 to 2007.

This is contrast to the more hawkish members of the FOMC, who underline that the unemployment rate has been found to be the best measure of labour market slack.

This level of disagreement over the interpretation of the labour market data is another example of how “Forward Guidance” is doomed to fail. If the Fed cannot create a consensus backcast of labour market under-utilisation seen one month ago, it seems unlikely that they can plausibly convince bond market participants to take career risk based on what the committee might do about interest rates two years in the future.

(c) Brian Romanchuk 2013


  1. Nice post! It'll be interesting to see the effect discouraged workers will have on the unemployment rate. Last I checked, the amount of discouraged workers is at record levels. Once these return to the ranks of job seekers, the rate of unemployment could stay stagnant (or even rise a tad). Any thoughts?

    1. Thanks.

      I thought for some time (pre-blog) that we would see the effect you described - discouraged workers returning, slowing the fall in the unemployment rate (although it will probably still fall, as I expected faster employment growth to kick in by now). This was the pattern in other cycles (participation rate rising as the cycle progressed).

      But this time, the job growth has just kept up with population growth (employment ratio only rising 0.2% per year), so this apparently has not been enough to draw people back in.

      If employment growth does not increase, my guess is that the pool of long-term unemployed (who are still counted as in the labour force) that will become discouraged will become smaller, and so the unemployment rate should stop falling. But that means we are in a "lost decade" scenario, which is depressing.


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