Dennis Lockhart on the shadow labor force: Policy is on track

The shadow labor force

The Census Bureau for the Bureau of Labor Statistics conducts a survey of households to collect the data used to construct the unemployment rate. To be counted as a member of the labor force—that is, in the calculation of the official unemployment rate—respondents have to indicate that they were either working or available to work in the previous month. Evidence of availability for work is the claim to have actively sought employment in that month. Otherwise, they’re not in the labor force. Those who are available and have looked for work in the past year but haven’t recently looked for work are labeled “marginally attached.” They’re not in the official labor force, so they’re not officially unemployed. You might say they are a “shadow labor force.”

Moreover, this class of shadow labor force isn’t static, as about 40% join the official labor force in the subsequent month, and about 10% of these find jobs right away—moving from unofficially unemployed to officially employed within a month. This builds a case for including at least a fraction of this shadow labor force as “unemployed.”

The President of the Atlanta Fed, Dennis Lockhart, in his speech, discussed the hierarchies of unemployment measures published by the Bureau of Labor Statistics. He talked about the six levels, U-1 through U-6. U-3 measures the official headline unemployment rate, while U-6 counts the marginally attached in the pool of the unemployed and people working part-time for economic reasons as full-time workers. However, these measures become elevated in times of recession. So what the U-6 captures matters.

The health of the labor market clearly affects individuals’ decisions. People choose to participate based on their sense of employment prospects, the costs associated with going to work, and the feasibility of alternatives to work. In short, they weigh all possibilities against opportunity costs based on the prevailing economic conditions before deciding on an alternative. This may even guide their responses to the Census survey for unemployment data.

According to Lockhart, official unemployment data coming close to the target unemployment figure doesn’t mean the nation is approaching full employment. Getting close to full employment would involve substantial absorption of this shadow labor force. This also means that the current unemployment rate of 6.7% nearing the target rate of 6.5% doesn’t call for a liftoff. Instead, there’s a need for a more accommodative policy, and deferring the liftoff a while longer in order to achieve real and sustainable full employment.

Conclusion

Dennis Lockhart’s views on the economic outlook are clear. Despite a weak first quarter, the economy will resume growing at the accelerated pace we saw in the second half of 2013. The economy’s fundamentals are strong, headwinds have diminished, and the current stance of monetary policy (which is the ultra-low-interest rate policy accompanied by the wind-down of the asset purchase program) is on track.

The performances of popular exchange-traded funds (or ETFs) like the SPDR S&P 500 ETF (SPY), the iShares Core S&P 500 ETF (IVV), and the iShares S&P 100 ETF (OEF), which track large-cap equities of companies like Apple Inc. (AAPL) and Exxon Mobil Corp. (XOM), serve as a good indicator of the course of the U.S. economy.

The pivotal question is about the liftoff. However, with both inflation and employment being short of the goal, a liftoff doesn’t seem to be in the cards until late 2015.

To learn more about employment and policy, see the Market Realist series Why the US labor recovery supports equities and high yield credit.