Fed Economists: 2 More Years Before U.S. Labor Market Returns to Normal

Photo by istockphoto.com
Photo by istockphoto.com

Unless new economic shocks upset the rate of improvement, it will take at least two more years before the U.S. labor market returns to its historic norms.

Crunching together 23 different labor market indicators, two economists with the sometimes-contrarian Federal Reserve Bank of Kansas City said that though the rate of change is well above the average of the last 20 years, it hasn’t translated into an equivalent rate of improvement in labor market conditions.

What that means is that despite the acceleration in job creation, temp hiring, job availability, and other labor market measures, the national unemployment rate will continue to decline only slowly.

What the economists measure

The indicators developed by the Fed Bank’s economists measure:

  1. Level of activity: How far are labor market conditions from historical averages?
  2. Rate of change: How rapidly are conditions changing compared with the past?

fed-reserve-labor-market-chartNeither is a direct indicator of unemployment or underemployment, though the level of activity takes into both measure — and other measures — into account. As the rate of change accelerates, the level of activity should, which would mean a reduction in unemployment.

Whether the U.S. economy will ever return to the historical unemployment rate of about 5 percent is a subject of much debate among economists. Economists at the Federal Reserve Bank of San Francisco examined   unemployment rate changes, saying:

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…the “normal” unemployment rate may have risen as much as 1.7 percentage points to about 6.7 percent, although much of this increase is likely to prove temporary. Even with such an increase, sizable labor market slack is expected to persist for years.

No definition of what the new “normal” is

The report from the Kansas City Fed doesn’t talk about what the new “normal” is, or what it will be. Its purpose is to offer a better way of making sense of the monthly economic data that can more resemble a roller coaster than a rocket. Aggregating the various reports, and their often contradictory data, into two measures provides a sharper look at what the data means.

Besides helping economists forecast labor availability and giving recruiters and workforce planners a heads-up about sourcing and hiring, the measures also have implications for Fed policy.

Esther George, president of the Kansas City Fed Bank, has taken a contrarian view of the Fed Board’s bond buying program. She has argued that the market is growing faster than economists think, and for that reason, the Fed should begin cutting back on its aggressive stimulus program and allow interest rates to rise.

John Zappe is the editor of TLNT.com and a contributing editor of ERE.net. John was a newspaper reporter and editor until his geek gene lead him to launch his first website in 1994. He developed and managed online newspaper employment sites and sold advertising services to recruiters and employers. Before joining ERE Media in 2006, John was a senior consultant and analyst with Advanced Interactive Media and previously was Vice President of Digital Media for the Los Angeles Newspaper Group.

Besides writing for ERE, John consults with staffing firms and employment agencies, providing content and managing their social media programs. He also works with organizations and businesses to assist with audience development and marketing. In his spare time  he can be found hiking in the California mountains or competing in canine agility and obedience competitions.

You can contact him here.

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