Why We Need to Look at More Than Job Growth to Get a Real Sense of the Economy

The payroll pictures this month were weak, while the unemployment picture was slightly better.

Hundreds of people line up to attend a job fair in April n New York City.
National Journal
Catherine Hollander
Feb. 7, 2014, 4:57 a.m.

Payroll growth in Janu­ary was dis­ap­point­ing: a measly 113,000 jobs, the Bur­eau of Labor Stat­ist­ics said Fri­day morn­ing, well be­low eco­nom­ists’ fore­cast for a gain of 180,000.

On top of that, the Decem­ber payroll num­ber — the ugly, 74,000 jobs num­bers that every­one hoped would be re­vised up in the latest re­port — was barely changed.

However, the oth­er gauge of the labor mar­ket’s health, which comes from a dif­fer­ent BLS sur­vey, tells a dif­fer­ent story. The un­em­ploy­ment rate dropped to 6.6 per­cent last month, from 6.7 per­cent at the end of 2013.

Cru­cially, it did this while labor-force par­ti­cip­a­tion rose, mean­ing more people were either work­ing or seek­ing work. This is what eco­nom­ists call a de­cline for the “right reas­ons.” In past months, however, a de­cline in par­ti­cip­a­tion — dis­cour­aged work­ers drop­ping out of the labor force — has con­trib­uted to the fall­ing job­less rate. 

The con­trast­ing nature of the labor mar­ket’s two head­line num­bers re­veals how dif­fi­cult it is to use a single in­dic­at­or when dis­cuss­ing the job mar­ket these days.

It’s a prob­lem that has been ac­know­ledged at the Fed­er­al Re­serve, which has said it ex­pects to keep its bench­mark in­terest rate low “at least as long as” un­em­ploy­ment re­mains above 6.5 per­cent. Janet Yel­len, the new chair of the Fed, said the un­em­ploy­ment rate was prob­ably the single best in­dic­at­or of job-mar­ket health last spring. But, she said, “the un­em­ploy­ment rate also has its lim­it­a­tions.”

So even though the Fed said it might start to raise its bench­mark in­terest rate once that num­ber reached 6.5 per­cent, the wiggle room af­forded by this as­ser­tion — “at least as long” — in the cent­ral bank’s policy state­ment lets it take oth­er vari­ables in­to ac­count: factors such as the rate at which people are quit­ting their jobs and get­ting new ones, the long-term un­em­ploy­ment rate, and labor-force par­ti­cip­a­tion.

Mo­hamed El-Erian, the out­go­ing chief ex­ec­ut­ive of glob­al in­vest­ment firm Pimco, wrote in the Fin­an­cial Times Thursday that he thinks the job­less rate is los­ing its util­ity . El-Erian ar­gues that not only is the un­em­ploy­ment rate be­com­ing an in­creas­ingly use­less lag­ging in­dic­at­or — how well it de­scribes the health of the labor mar­ket — he also says it’s be­com­ing a bad lead­ing in­dic­at­or. Spe­cific­ally, he says the un­em­ploy­ment rate is no longer good at pre­dict­ing what the Fed will do.

“The Fed is slowly ex­tend­ing the concept of thresholds to a wider ar­ray of vari­ables, in­clud­ing more hol­ist­ic meas­ures of the labor mar­ket and, more im­port­antly, in­fla­tion tar­gets that are in ex­cess of the cur­rent (and pro­jec­ted) rate,” he said.

The payroll pic­tures this month were weak. The un­em­ploy­ment pic­ture was slightly bet­ter. A caveat: The sur­vey that pro­duces the payroll num­ber is lar­ger, and less volat­ile on a month-to-month basis. As such, eco­nom­ists af­ford its monthly read­ing slightly more weight than the sur­vey that pro­duces the un­em­ploy­ment readout. But to un­der­stand the labor mar­ket, we’ve got to talk about both.

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