What the Headline Number Doesn’t Tell You About Unemployment
Earlier this year, the Federal Open Market Committee (FOMC) said that it would keep the target federal funds rate near zero as long as overall labor market conditions remain weak — and this, it turns out, could be a very long time.
Although unemployment remained broadly unchanged between March, April, and May at 6.3 percent, down from 7 percent late last year, the headline number can sometimes mask underlying weakness in the labor market. The Fed recognized this in March when it abandoned a 6.5 percent unemployment threshold in favor of maximum employment, as directed by its mandate. Although the threshold is more ambiguous, it does allow the Fed more flexibility and promotes measuring success against alternative indicators of labor market health.
For example, an interesting figure highlighted by the Bureau of Labor Statistics is the number of unemployed reentrants, or persons who had previously worked but had moved out of the labor force before beginning their current job search. The number of reentrants has increased by 237,000 between April and May this year. This increase could mean that people who were laid off due to economic weakness believe the job market is finally healthy enough to return to. However, people are sometimes forced back into the labor force for economic reasons, and given challenging business conditions and rising living costs, this could be a contributing factor.
On the bright side, the number of job losers and persons who completed temporary jobs declined by 218,000 May, which is a good sign because fewer job losers would mean the ones who are hired are being retained for longer periods of time. Another stat supporting a healthier labor market is that the number of people unemployed for more than 27 weeks — the long-term unemployed — is down by 979,000 from April last year.
But something that is slightly more worrying is that the reduction in the number of lay-offs over a year has been hardly significant. The total number of lay-offs fell from 1,700,000 in April 2013 to 1,651,000 in April 2014, the BLS monthly Employment Situation report showed. Adding to this worry is weakness in the labor force participation rate, which is something that the Fed has been closely looking at. The labor force participation rate — which is the pool of persons who are willing and able to work — has declined from 63.4 percent in May 2013 to 62.8 percent in May 2014.
“Some of the weakness in participation is also likely due to workers’ perceptions of relatively poor job opportunities,” the Fed said in its Monetary Policy Report, which was released earlier this year.
While the hard data is mixed, sentiment in the job market has remained very weak. The number of discouraged workers fell only slightly to 697,000 in May this year from 780,000 last year, BLS data reflects. The number of people who are employed part time for economic reasons — that is, are employed part time though want to work full time — has not decreased significantly. The number has declined from 7,917,000 in May 2013 to 7,269,000 in May this year.