Underutilization in U.S. Labor Markets
Federal Reserve Bank of Boston President Eric Rosengren tempered the recent news on improving economic growth and declining unemployment in a speech at the New College of Florida.
While the narrow measure of unemployment has been improving, the broader measures from the Bureau of Labor Statistics show that over 20 million Americans are currently either unemployed, are marginally attached to the labor force (including "discouraged" workers), or are working part time when they would prefer full-time work.
"For these Americans, it is all too painfully apparent that labor markets remain far from their state prior to the recession," said Rosengren. "Using the narrow, widely reported unemployment rate alone could suggest a misleadingly optimistic state of affairs."
The broader measures of unemployment remain unusually high relative to the narrow (U-3) measure of unemployment, said Rosengren. In fact, the broader the measure, the further the current reading is from its pre-recession level and from its average from 1994-2007.
Rosengren noted that while his talk focused on data points and measures, "we cannot lose sight of matters of human toll and potential, as well."
The broadest measure is particularly striking. It includes people who are available to work full time but have had their hours reduced, or can only secure part time work. "Even at this point in the recovery, the measure is still nearly four and a quarter percentage points or 6.5 million people above the pre-recession average," said Rosengren. "The large number of individuals working part time for economic reasons highlights the need for much more improvement in labor markets."
As a result, Rosengren firmly believes that monetary policymakers should remain quite patient in removing accommodation. "In my view, labor-market conditions remain far from where they would need to be to justify raising short-term rates." This perspective, he noted, is consistent with the recent FOMC statement indicating that the Committee expects short-term interest rates to remain low well past the time that the unemployment rate declines below the 6.5 percent threshold.
Rosengren also pointed out how much higher all the unemployment measures are now than they were June 2004, when the Federal Open Market Committee first tightened rates during the previous recovery.
And a patient approach to removing accommodation is further justified, said Rosengren, because inflation is so subdued - the inflation rate remains far below the Fed's 2 percent target.