Tag Archives: unemployment rate

What Unemployment Rate Doesn’t Say

Let’s assume that proposed minimum wage increase to $10.10 is signed. Then according to very basic upward sloping supply curve, we would expect more labor supply. That means, there would be more people entering to the labor force from the pool of discouraged workers. These entering people wouldn’t find a job quickly. Therefore, there will be some upward movement in unemployment rate.

The point of this post is that if the minimum wage indeed increases and the unemployment rate increases, that isn’t necessarily be a bad, and the increase in minimum wage shouldn’t be blamed as much. On the other hand, the increase in minimum wage could overturn discouraged workers into labor force, and I believe that is not a bad.

Of course, there might be a direct effect of the increase in minimum wage on unemployment because companies would have to fire some workers when the minimum wage increases (I believe that is what people who are against the minimum wage increase are saying). What I am suggesting is that let’s not fully blame an increase in minimum wage if there is to be higher unemployment rate after this change in wage.

This argument is just to show that any certain change in only unemployment rate doesn’t tell the whole story on whether the economy is performing well. If we look at the recent unemployment rate which came out on Friday morning, 6.6% of unemployment is a good news for the economy. As I said on higher minimum wage’s effect on labor force participation rate, this change in unemployment rate could be caused by people going out of or getting in the labor force. In December’s job report, the decrease in unemployment rate from 7% to 6.7% as the economy gained 75,000 more jobs was mostly due to the increased number of people dropping out of labor force.

Also, this one number called unemployment rate doesn’t tell us enough information because it is an aggregate rate over the U.S.. The WSJ article nicely sums up this point:

“We have multiple unemployment rates—by race, gender, geography and above all educational attainment. When people talk of an unemployment crisis, it would be more accurate to speak of an education crisis or a crisis of men whose skills are mismatched to today’s jobs. It would be more accurate to speak of a jobs crisis in specific regions of the country or for specific industries. Yet we maintain the collective fiction that one simple average accurately captures multiple realities.”

The WSJ article says that we have to consider the employment rate as we discuss economic condition. The recent job report shows another improvement in terms of increased employment-population ratio. The ratio increased to 58.8% in January, which is the highest level since August 2009, but it is well below pre-recession level of 63%.

As the unemployment rate goes down faster than expected, another news we are watching is whether the FED will increase its federal funds rate because of a decreasing unemployment rate.  The FED’s January meeting statement says:

The Committee also reaffirmed its expectation that the current exceptionally low target range for the federal funds rate of 0 to 1/4 percent will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.

This policy of low interest rate as long as the numbers are within the range has been re-evaluated. The FED’s same statement reads:

The Committee now anticipates, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6-1/2 percent, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal.

What we can tell from this FED’s change in policy view is that the FED doesn’t give any meaning for the 6.5% of unemployment. Pointing out some number is just the FED’s way to increase their credibility and convince the public that it will maintain its low interest rate policy. The FED, seems like, didn’t expect the unemployment rate would fall down to this rate this quickly. It will be interesting to see what target rate the FED will choose if they continue the low interest rate policy even though the unemployment rate falls below 6.5%.

In conclusion, even though unemployment rate is one of the main economic data we look, it hides so much of what is happening in the economy. Therefore, we shouldn’t draw quick analyze from the rate.

Unemployment Levels and Labor Force

Ever since the Great Recession hit the United States several years ago, the unemployment rate has been a point of large concern. Anyone that has read or heard anything from the news within the last five years has been informed of the high rates of unemployment throughout our country. The overall level of unemployment has of course come down since ’08-’09, but it is still at a level above what most people would normally like to see. Something that needs to be considered, however, is the fact that a drop in the unemployment rate is not always a good thing (or at least not always caused by something good). Generally, in our minds, unemployment equals bad, but let’s think about its relationship with the size of the labor force.

Going back to simple definitions, the unemployment rate is the ratio of the total number of unemployed people (must be looking for work) to the size of the labor force (which includes people with a job, a.k.a employed, as well as unemployed people looking for a job). Thus, the unemployment rate can fall for several reasons. The first being that some of the unemployed people actually find jobs and therefore increase (E), while decreasing (U) (and keeping L=U+E the same). This is of course good. The second case is that some unemployed people simply stop searching for a job, which decreases (U), but does not increase (E) as before, and thus (L) falls as well. The unemployment rate also falls in this case, but not for a good reason. This is exactly what has been happening recently in New Jersey. “Some 63.9% of people in the state were working or looking for work in December 2013, down from 66.4% at the start of the year. That 2.5 percentage point drop in what is called the labor force participation rate compares to just a 0.8 point drop in the national rate.” All too often, we are focused on trying to decrease unemployment rates in this country, and sometimes do not take into account the possibility that people are actually giving up on trying to find a job.

On a related note, higher unemployment is not bad for everybody (especially if lower unemployment is only occurring from a drop in the size of the labor force). “Companies that cater to cost-conscious consumers in hard-hit regions could see sales affected in a positive way. Two companies I’d highlight in this context within these nine states are Wal-Mart (NYSE: WMT) and fast-food giant McDonald’s (NYSE: MCD).” Stores like Wal-Mart completely cater to consumers looking to get the biggest bang for their buck, and will very likely attract more sales when the unemployment rate is higher and people have lesser or no income. Similarly, McDonald’s thrives on the view that fast food is less expensive than other options, which benefits them (along with other fast food chains) in areas of higher unemployment and lower income.

Overall, I believe that collectively we need to be more aware of the situations concerning unemployment rates. A drop in unemployment rates should not be automatically associated with something good, especially when reading the news. To me, a drop in the size of the labor force is probably even worse than a bit of a higher unemployment rate. At least people are still looking for a job and still have hope if the unemployment rate is a bit high (as well as companies like Wal-Mart and McDonald’s benefitting). The worst-case scenario is that people completely give up hope, stop looking for a job, and drop from the labor force.

Interpreting the Drop in the Unemployment Rate

As the U.S. economic recovery picks up momentum, the Federal Reserve must make decisions about when to raise interest rates. According to the Wall Street Journal, “If [Janet Yellen] and her colleagues wait too long, they could fuel high inflation or financial bubbles; if they move too soon, they could damp a recovery that is just gaining steam”. The decision of when to raise interest rates is dependent on the state of the U.S. economic recovery and an important indicator of the recovery is the unemployment rate, which has been steadily declining.

Janet Yellen, who will be replacing Ben Bernanke, must be careful when interpreting the fall in the unemployment rate. According to the Wall Street Journal, “[Janet Yellen] and other Fed officials worry [the unemployment rate] masks large pockets of stress still plaguing the labor market, including millions of people who want to work but aren’t looking anymore and therefore are no longer counted as unemployed”. The December employment report indicated that the unemployment rate was 6.7%, but the 0.3% drop was largely due to a falling labor-force-participation rate. Normally, a falling unemployment rate indicates a strengthening economy. However, in this situation the falling unemployment rate is due to signs of a weak labor market where people who want to work cannot find jobs.

For this reason, I am a strong supporter of keeping short-term interest rates lower for longer. The declining unemployment rate is not a reason to be delighted about the U.S. economy as it is being pushed by the labor-force-participation rate. However, I also like to consider myself an inflation hawk. Thus, keeping rates low when the economy picks up steam is not something that I want to see. This is a tricky decision, but I have much faith in Yellen.

Upcoming this Friday is another employment report, which will provide an updated unemployment rate. The unemployment rate has been steadily declining and some think this trend will continue. According to the Wall Street Journal, “Friday’s jobs report could very well show the U.S. unemployment rate fell again in January – this time perhaps in part because federal jobless benefits have ended”. The unemployment rate is already near the Fed’s threshold of 6.5% and another decline could push it below the Fed’s threshold. At this point, the Fed has stated they will consider raising interest rates. Not only does this put pressure on Yellen and other Fed officials to make a decision on when to raise interest rates, but financial markets will likely begin speculating about how soon the Fed will raise rates. As a result, there might be increased volatility in financial markets unless the Fed can provide clear forward guidance.

If upcoming employment report shows a declining unemployment rate, then one explanation might be the expiration of federal unemployment benefits. This could cause the unemployment rate to fall for two reasons. First, people might stop looking for work without unemployment benefits. According to the Wall Street Journal, “Some job seekers will give up the search when they run out of benefits, research suggests. To get state jobless benefits – and federal benefits when they were in effect – recipients have to keep applying for jobs. Some who believe they face long odds finding a job may figure it is still worth the effort if they are receiving the benefits…”. Therefore, without benefits some people might give up their search. If this actually takes place, then I would not be surprised if Congress tried to renew the unemployment benefits. Second, people might take jobs that they would not have taken if unemployment benefits continued. According to the Wall Street Journal, “Others will find a job, perhaps because they are more willing to take one that pays less than they wanted”. In this case, people are actually taking jobs rather than becoming discouraged workers. In both cases, the unemployment rate will fall.

I am curious what the upcoming employment report will show. I think it is an especially important report because it is the first one since the surprisingly weak December report. If this report is weak again, then it might mean the December report was not an outlier (as many people are hoping).

Bernanke goes out without a bang

It didn’t end with fireworks. Instead, all ten Federal Open Market Committee officials shook their head in agreement as Wednesday’s meeting ended. The taper, as Chairman Ben Bernanke announced last week, would continue in February by cutting another $10 billion from the Fed’s purchases of Treasury bonds. As the U.S. continues to grow modestly month-by-month, most are in agreement that stimulating the economy is still needed, but less and less. Bernanke’s eight year run as chairman of the Fed will come to its end sometime in February, and the biggest news from his last meeting was that he could finally find a consensus for the first time in over two years.

As Janet Yellen prepares to take the reins, her first big challenge may not even be within the U.S. The only real obstacle to whether Wednesday’s decision would go through was the news coming from developing economies around the world, whose inflation grows and interest rates rise as the U.S. cuts back on their bond buying. As U.S. interest rates rise, investors are bringing their money back from abroad. The sudden withdrawals from these markets, including Turkey and South Africa, in particular, are putting pressure on these foreign currencies as they scramble to bring their interest rates back up. Their actions may have larger consequences, as “[Turkey and South Africa’s] rate increases could only raise the pressure on other central banks in emerging markets with fiscal concerns to take similar steps.” (Lauricella et al, 2014) Historically, the Fed has taken a position that it will do what is best for America and the other central banks will have to fix their problems on their own. On Wednesday it was no different.

Things are looking up at the Fed as Yellen comes into her term. The unanimity seen this week at the Fed is a good sign, and brings increased confidence that the Quantitive Easing (QE) plans have done well as they continue their descent. However, if U.S. economic data can continue to show positive signs (the U.S. unemployment rate dropped below 7% in December for the first time since 2008), the Fed may be back to business as usual – pushing and pulling the interest rate. However, the Fed’s between-the-lines dialect was modest on Wednesday as they continued to call U.S. economic growth “moderate.” For the foreseeable future, interest rates will stay low, growth will stay moderate, and the Fed will stay its course. On Wednesday, it seems that no news was good news, at least for the U.S.

Featured articles:

Hilsenrath, Jon, and McGrane, Victoria, “Fed sticks to script on paring bond buys,” The Wall Street Journal. Link

Lauricella, Tom, Katie Martin & Tommy Stubbington, “Investors face shift in markets as Fed scales back stimulus,” The Wall Street Journal. Link

(Revised) The Fed’s Dual Mandate: The Pursuit of Happiness

The Federal Reserve (Fed) has a dual mandate, which requires maintaining maximum employment and price stability. Following the financial crisis in 2008, the worst recession since the Great Depression, the Fed assumed a significant (possibly revolutionary) role in financial markets.

Due to the sharp decline in employment and inflation, the Fed cut the federal funds rate to unprecedented lows of 0.00%-0.25%. Believe it or not, the Fed wanted to cut rates even further! Unfortunately, the Fed had reached the zero lower bound. If the fed funds rate went below zero, people would just hold cash that pays no interest rather than lend it out at a negative rate of return. Thus the Fed decided to enter uncharted territory with large-scale asset purchases known as quantitative easing (QE).

On the one hand, the fed funds rate is the short-term interest rate that is the Fed’s main conventional monetary policy tool. On the other hand, QE is intended to drive down all long-term borrowing rates and is appropriately considered unconventional monetary policy.

The logic of QE is something like this – the Fed’s buying of long-term Treasuries and mortgage-backed securities reduces supply, which causes the price of those securities to rise and the yields to fall. This also impacts the yields on other long-term securities. By flattening the yield curve, the Fed aims to stimulate many types of economic activity such as the housing market and business investment.

The Fed also uses forward guidance to create an expectation that interest rates will remain low for awhile. Forward guidance directly impacts expectations, which are immediately priced into financial markets. For example, the yield on long-term treasuries spiked when the Fed seemed to hint it was ready to taper during the summer (surprisingly the Fed chose not to taper). In their forward guidance, the Fed has indicated that the fed funds rate will stay low as long as the unemployment rate is above 6.5%.

Recently, the Fed announced its decision to cut the bond purchases by $10 billion. The Fed also signaled its intent to continue reducing its bond purchases in 2014 as long as the economy seems healthy enough. According to the Wall Street Journal, “The bond buying will be slowly reduced as long as the economy sticks to the Fed’s projection of gradually quickening growth, declining unemployment and a slight uptick of inflation from near 1% to the Fed’s 2% target“. At the time, the decision to taper was well received by financial markets. I believe this occurred for two reasons – first, tapering was already priced in over the summer. Second, the Fed’s decision was based on strong economic data. On the one hand, tapering reduces liquidity. On the other hand, tapering is symbolic of an improving overall economy.

However, the December unemployment report demonstrated anything but a recovering economy. According to the Wall Street Journal, “American employers added a disappointing 74,000 jobs in December, a tally at odds with recent signs that the economy is gaining traction and moving beyond the supports put in place after the recession”. Fortunately, many believe this number is an outlier and that it will be revised upwards.

The employment report also contained information about the unemployment rate. According to the Wall Street Journal, “The jobless rate fell to 6.7% for the month, the Labor Department said, though the decline mostly reflects job seekers giving up their search and leaving the workforce”. Although the unemployment rate is declining, the drop in the labor-force-participation rate distorts the improvement. As the unemployment rate nears the Fed’s threshold, the Fed might want to consider lowering the threshold to 6%.

While the unemployment rate is moving in the right direction (despite the fact that it is for all the wrong reasons), the other half of the Fed’s mandate (inflation) is below target. The financial markets have not really priced in the possibility of deflation (negative inflation), which would be incredibly destructive. For example, Japan was stuck in a deflationary environment for a very long time and is only just beginning to escape. Not only might the Fed want to lower the unemployment threshold, but the Fed might also want to consider implementing an inflation threshold (of maybe 1.5%-2.00%).

The Fed must demonstrate credibility in order for forward guidance to be effective. The Fed has tried to clearly express guidelines surrounding its decision to eventually raise interest rates. Keep interest rates low makes sense as long as inflation is below target and unemployment is above the Fed’s threshold.

Despite the disappointing December employment report and the low inflationary environment, Fed officials have expressed their intent to continue tapering. I think this is a good idea as stopping the taper would likely create concern in financial markets that the Fed has lost faith in the recovery.

All eyes will be on the FOMC meeting next week.

Labor participation rate decrease is more complicated then some let on

One of the most striking things I noticed while writing my previous post about Friday’s unemployment numbers was the persistent decrease in worker participation rate over time. The graph, taken from bls.gov, looks like this.


The common explanation for the shape of this graph is that the baby boomers are retiring, and so we will see that the workforce participation rate falls as a large portion of the workforce retires.  Currently we see a reading 62.8%, the lowest it has been since the late seventies.  The fact that this chart is decreasing is not very concerning; it is more of a demographics issue then anything else.  But with it accounting for so much of the decrease in unemployment, there has to be something more going on here.  It was 7% in November, 6.7% in December; .3 per cent of the workforce didn’t retire last month.  Young people staying in school longer also can’t explain it away either,  as many of them most likely haven’t entered yet.  Consider this next chart, from calculatedRiskBlog.com, that considers the percent of individuals employed in the demographic of 24-54 years of age, shown alongside their participation rate for that demographic.  The important difference between the two numbers is that the employment –population ratio includes people that are not actively looking for work, stay at home moms, retired/rich individuals, etc.  It counts everyone in its employment figure.


As it would any demographic group, periods of recession are harmful, as can be seen by the step downturn in the red curve in the blue shaded areas.  At the far right of the graph we see a bit of a difference developing compared to the previous recoveries.  The relatively flat 75-76% employment rate we see among 25-54 year olds means they aren’t finding work as quickly as their counter parts in decades past.  If it is in fact these individuals who are the discouraged workers we see giving up, their choice may indicate an increase in the natural rate of unemployment, which could have far reaching consequences with regards to future productivity.

Daniel Sullivan, from the Federal Reserve Bank of Chicago, presented (this) in June of 2013.  In it, Sullivan mentions that older workers have actually started “bucking the trend” and are working longer then previously anticipated.  While this does not infer that the older workers are crowding out younger workers (lump of labor fallacy), it does support the idea that more then just baby boomer retirement is driving the decrease in the workforce participation rate.  However, the picture is just as depressing for 25-54 year olds, perhaps more so.


The green line indicates the labor force trend in general.  The red and blue lines represent the actual data on labor force participation for the given demographics.  It is clear that since the recession, both men and women 25-54 are one of the causes of the downward trend.

Blaming the significant decrease in the labor participation rate on the retirement of the baby boomers is more then an over simplification.  The dearth of good jobs for 25-54 years olds is something that is holding the US recovery back, and will no doubt have effects on future productivity for a country soon to be full of retirees and people who wanted to start careers.

December Employment Report: Implications for Monetary Policy

During the weekend, I looked a little further into the December employment report. In order to understand some of the more striking figures on the surface, I found it helpful to dig a little bit behind the numbers.

Let’s begin with nonfarm payrolls, which grew by 74,000. Not only is that number substantially below the expected gain of 200,000, but it is also the slowest pace in three years. The impact of inclement weather is considered to be an important factor. According to the Wall Street Journal, “An unusually high number of people said bad weather kept them away from work during the employment report’s survey period, suggesting cold and snow dampened the count”. However, taking a deeper look into the data shows that both weather-sensitive industries (i.e. construction and leisure) and non-weather-sensitive industries (i.e. business services and health care) registered poor results. In other words, there was restrained employment growth in weather-sensitive industries as well as non-weather-sensitive industries (If non-weather-sensitive industries outperformed weather-sensitive industries, then that would be another story). As a result, bad weather might not be a reasonable explanation for the significant miss on the downside in nonfarm payrolls.

Are the results of the report weak enough to suggest that the expansion is faltering? Hopefully, not. According to the Wall Street Journal, “[Federal Reserve Bank of Richmond President Jeffrey Lacker] said economists typically don’t view data from a single month as indicating whether the economy is shifting into a higher or lower rate of growth”. I find myself agreeing with Mr. Lacker. Nonetheless, the weak report raised doubts about emerging views that the recovery is gaining momentum.

Now let’s consider the drop of 0.3% in the unemployment rate to 6.7% (an unexpected improvement). A primary cause of the drop in the unemployment rate was due to individuals leaving the workforce. According to the Wall Street Journal, “The labor-force participation rate – the proportion of people 16 and over either with a job or seeking one – fell to 62.8% from 63%. If it had remained stable, the unemployment rate wouldn’t have budged”. Consequently, frustration among potential workers rather than fundamental improvement was the driving force behind the lower unemployment rate.

If you feel that the miss in nonfarm payrolls is significant enough to warrant concern about the health of the U.S. economy, then you might expect the Fed to reconsider its decision to taper. When you compound that feeling with the decline in the labor-force participation rate, you might become truly frightened for the U.S. economy. Federal Reserve Bank of Richmond President Jeffrey Lacker said Friday, “Federal Reserve officials are likely to consider another reduction in their bond-buying program later this month, despite Friday’s weak jobs report”. Not only do I agree with Mr. Lacker, but I think it is what most investors are expecting. Hypothetically, what if the Fed retreated on their decision to taper (and added to QE)? I think investors might sell because it would imply that the Fed is questioning the health of the economy. On the contrary, some investors might take it as a comforting notion indicating that the Fed is willing to be incredibly accommodative in providing liquidity and helping restore economic growth (after all, the Fed’s decisions going forward will be both an art and a science).

The difficulties interpreting this decline in the unemployment rate might encourage the Fed to reduce its threshold for the unemployment rate to 6% from 6.5%. According to the Wall Street Journal, “Nobody will be surprised if the Fed further reins in its bond-buying program when it meets later this month. But it may offer a dovish take on how much labor-market improvement it will need to see before raising short-term rates – something investors aren’t yet prepared for”. I think the Fed would be wise to revise their threshold for the unemployment rate especially when considering what is moving that number. Reaching the threshold is a prerequisite for talks about raising the interest rate target. It looks like we are set to reach that threshold soon and not for the right reasons (i.e. an improving economy). Due to the importance of forward guidance in maintaining expectations, I think it is important for the Fed to lower the threshold for UE and communicate a low interest rate policy.

Inflation vs Unemployment

Empirical data speaks to an inverse relationship between unemployment and inflation.  The FED has made no secret of its targeting the unemployment rate for an increase in the federal funds rate (announcement here) .  Setting a barrier of 6.5%, it has made clear that it will consider increasing the federal funds rate when unemployment falls below the barrier.  Although many indicated that this barrier probably wouldn’t be violated until sometime in 2015, Saturday’s Wall Street Journal (article here) reports that unemployment has fallen to 6.7% in December, down from 7.0% in November.  However due to the nature of the decrease, there is reason to believe that the FED may not even consider increasing the rate should the unemployment drop below 6.5%.

On the surface a .3% decrease in unemployment would seem to be a good thing, but in this case the cause for the drop is not due entirely to workers finding jobs.  Most of the decline can be attributed to many people just giving up and dropping out of the work force.  This can be seen in the steady downward trend in the graph of workforce participation over time.  Should this phenomenon repeat itself next month, the FED could potentially find itself with a tough decision. On one hand, unemployment has decreased, and some would have reason to believe that the economy could handle and should receive a rate increase.  On the other hand, the decrease in employment was achieved through an anomaly in the way unemployment is measured, so the economy really isn’t as healthy as the measure would indicate.  Perhaps we can get an idea of what the FED will do in this increasingly likely event by examining one of the FED’s own research reports.

In an economic commentary article published December 4th 2013, Edward Knotek and Saeed Zaman look to answer the Question “When might the Federal Funds Rate Lift off?” (report here) The authors predict that such an event would most likely occur sometime in 2015, with the third quarter having the highest probability.  According to these predictions published last month, we should be happy the economy is making a recovery but the economies growth isn’t ahead of schedule.  This commentary did not take into account that discouraged workers would drop out of the work force. The commentary goes on to indicate that the rate may very well remain low even in the case of a break below 6.5% because of low levels of inflation, going so far as to say targeting a floor of 1.75% inflation could cause a “considerable delay” in the increase of the rates, from their 2015 prediction.  This provides strong evidence as to the attitude of the federal reserve as to potential role of inflation in their thinking.

If the above commentary is any indication of what the FED is thinking about doing, a rate increase shouldn’t be anticipated  even if unemployment crosses the 6.5% barrier because inflation would not be high enough to support such a decision.  Despite data that suggests recovery and a decreased unemployment reading, the interest rate may continue to be low for the foreseeable future due to a lack of inflation and the deceptive nature of the measurement of unemployment.

Deceptive Employment Statistics

According to the United States Department of Labor and Justin Lahart of the Wall Street Journal, 74,000 jobs were added to the economy in the month of December 2013. This is the lowest in the past three years. Furthermore, this was much less than anticipated. A potential contributing factor to this is bad weather. The Federal Reserve is ignoring this statistic. The unemployment rate dropped from 7 percent to 6.7 percent. This is important because 6.5 percent is the target rate for policymakers. Labor force participation has been declining since 2007. Two contributing factors are the baby boomer generation reaching retirement age and people staying in school longer than they used to. The prime range of ages to be employed are between 25 and 54. Normally people in this age group’s participation is not affected as easily, but participation has fallen by roughly 3 percent.

Interestingly enough, women were the winners in the month of December 2013. According to Catherine Rampell of the New York Times. Rampell’s article: “All December Job Gains Went to Women” states that women gained 75,000 jobs, on net, while men lost 1,000 jobs, on net. She then states that women represented fifty-six percent of the net gain of jobs in the past year.

All of these facts about recent addition of jobs to the economy can leave one with mixed feelings. 74,000 jobs is sub par and unexpected. Jared Bernstein of the New York Times mentions that the expected number of jobs added was 200,000 in his article titled: “Underlining the Recovery’s Shortfall”. However, it did lower the unemployment rate closer to the target 6.5 percent. This could cause optimism because the unemployment rate is closer to what policymakers want it to be. The fact of the matter is that 6.5% is not a healthy rate of unemployment. Jared Bernstein continues to mention, in his article, that the Congressional Budget Office determines that full-employment has a rate of 5.5 percent unemployment. In my opinion, that is what the policymakers need to target. By targeting a rate of 6.5 percent, they are accepting less than what is best for the country. The job market has undoubtedly been a huge concern since 2007, and these concerns need to be put at ease. That will not be done by targeting an unemployment rate that is 1 percent higher than the natural.

it is also interesting that women have been receiving the bulk of the spoils of new jobs in the economy. Maybe this could be a step towards the glass ceiling being overcome. The statistics shared in Rampell’s article could put some feminists at ease.




Disappointing December Job Reports

It is always interesting to see how financial markets react to economic indicators or other events. Financial markets economists forecast economic indicators, and  investors usually make their investment decisions basically based on economists’ forecasts before these indicators are actually announced. Once economic indicators are released, investors may strengthen or unwind their investment positions according to the discrepancy between the forecasts with actual data.

Today morning, Bureau of Labor Statistics at the U.S Labor department released the employment report of December 2013. Nonfarm payroll increased 74,000 and unemployment rate decreased to 6.5%. Due to the effect of the employment news, today the dollar depreciated 0.6% against the yen and 0.3% against the euro, and the price of benchmark 10 year Treasury bond rose 22/32. Also, Dow Jones Industrial Average fell 0.2%. That’s because the actual nonfarm payroll increase is far short of the markets forecasts. According to the Wall Street Journal, economists expected 200,000 job growth for the month. These market dynamics based on the forecasts and actual data release seems to show that the U.S. financial markets are quite efficient in the sense that information are revealed in the market prices without much time gap. Imagine that you have some magic power to foresee the future economic data, and how easy it will  be to earn money in the financial markets, which behave so efficiently. More realistically, North Korean leaders could make lots of money before they announce another serious nuclear theat by taking deep short position in korean stocks or long position in the U.S. bond markets.

Awake from the dream and let’s get down to business. Employment data are regarded as one of the most important economic indicators not only for financial markets investment decisions, but also for economic policy decisions and economic research. According to American Association of Individual Investors, employment indicators are ranked as 6th among the 10 most important economic data with GDP, M2 (money supply), CPI, PPI, and Consumer confidence survey ranked higher than employment data. Employment report, which is released every month by the Labor Dept., is composed of two surveys – household survey and establishment survey (payroll survey). The two surveys are quite different in their coverage and methods; payroll survey covers 400,000 business establishments and household survey covers 60,000 households; payroll survey counts the number of jobs and household survey counts the number of employed individuals; payroll survey includes only wage workers in nonfarm areas but household survey includes agricultural workers, self-employed as well as wage workers. (How Different Are They?, FRBSF Economist Tao Wu in the August 27, 2004, FRBSF Economic Letter)

Among these two surveys, payroll survey is generally accepted as more accurate indicators for employment with its much larger samples though two employment surveys show very similar movement in the long run. Former Federal Reserve Chairman, Alan Greenspan once said before the U.S. House of Representative on Feb 11, 2004 : “I wish I could say the household survey were the more accurate. Everything we’ve looked at suggests that it’s the payroll data which are the series which you have to follow.” (http://www.frbsf.org/education/publications/doctor-econ/2004/june/nonfarm-jobs-payroll-employment)

Economists and policy makers should be careful to interpret unemployment rate because unemployment rate could be misleading. As the Wall Street Journal pointed out, the decrease of the unemployment rate in December partly results from the fact that the unemployed gave up finding jobs for whatever reasons. We can infer this phenomenon from the fact that employment-population rate, which is defined as a percentage of the employed among population in the employment report, remained at 58.6% in December in spite of the decrease of the unemployment rate. This complication of the interpretation comes from the fact that umemployment rate is measured among the labor force, which stay in job markets. Therefore, economists and policy makers should carefully examine broad range of employment to evaluate the employment situations correctly.