E Little-Watched Non-Employment Index Confirms Strength Of Job Market Recovery

As the Fed hesitates over the pace of further monetary tightening, some critics say that standard unemployment data from the Bureau of Labor Statistics (BLS) overstate the strength of the recovery. By focusing on the number of employed as a percentage of the labor force, the critics say, the BLS ignores those who have dropped out of the labor force altogether. However, a little-watched indicator from the Richmond Fed, the Non-Employment Index (NEI), suggests that the critics are wrong.

The labor force, which forms the denominator of the standard unemployment rate (also known as U-3), consists of all persons who are working or have actively looked for work in the preceding month. People who want a job, but have stopped working, are omitted from both the numerator and denominator. In a typical month, there are millions of such labor force dropouts, even though they are not reflected in the standard statistics.

In an effort to take at least some of those labor-force drop-outs into account, the BLS publishes a supplementary index known as U-5, which includes discouraged and marginally attached workers in both its numerator and denominator. These groups include all those who want a job and have looked for one within the past year, but not within the past month. Discouraged workers cite their belief that there are no jobs to be found as their reason for not looking for work. Marginally attached workers give other reasons, such as family responsibilities. People who say they want a job but have gone longer than a year without looking for one are not counted in either U-3 or U-5.

Researchers at the Richmond Fed maintain that U-5 represents only a crude improvement over U-3. The problem, they say, is that neither of the official indexes takes into account the fact that different groups of workers have different rates of transition to employment from month to month. For example, about 28 percent of the short-term unemployed (those out of work for 26 or fewer weeks) find a job each month. At the other end of the spectrum, the transition rate for people who report that they are retired and do not want a job is just 1.4 percent.

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Gary Anderson 2 months ago Contributor's comment

Interesting. That must be why wages are soaring. Oh, wait, they aren't Ed. Maybe you have some data that is more recent on wages?

Ed Dolan 1 month ago Author's comment

As a further follow up to the issue of wages and jobs, check out my latest post, which explores the role of the rising cost of healthcare benefits in the slow growth of wages www.talkmarkets.com/.../employer-health-benefits-and-wages-the-good-news-and-the-bad

Ed Dolan 2 months ago Author's comment

Yes, it is a bit of a mystery why wages are not responding to labor market tightening. However, whatever the answer is to the wage puzzle, I do not think that the correct answer is that the labor market has a lot of hidden slack. Something else is going on. I will try to focus on that "what else" in future posts.