Why unemployment numbers overstate labor market improvements

Surbhi Jain

Is the FOMC achieving its goals? Narayana Kocherlakota weighs in (Part 6 of 8)

(Continued from Part 5)


Kocherlakota argued in front of his audience that the low inflation rate is a signal that the FOMC is underperforming with respect to its maximum employment objective. At the same time, he said people need not rely on this signal to reach this conclusion. This underperformance can be readily seen in numerous key metrics of labor market performance.

Industrial companies, being major contributors to the job market, are greatly affected by employment statistics releases. The performance of Industrials ETFs like the SPDR Industrial Select Sector Fund (XLI), which has companies like General Electric Co. (GE) and Boeing Co. (BA) in its portfolio, the Vanguard Industrials Index Fund (VIS), and the iShares Dow Jones U.S. Industrial Sector Index Fund (IYJ), serves as a good indicator of the industrial sector.

Laying the ground for his case on what measures the FOMC is taking towards achieving its unemployment objective, Kocherlakota began by pointing to data on the evolution of the unemployment rate.

In March 2007, the unemployment rate was 4.4%. It rose slowly throughout 2007 to reach 5% by the end of the year. The National Bureau of Economic Research dates the Great Recession as having begun in that month. In the wake of the recession, the unemployment rate had reached a peak of 10% in October 2009. Since that date, the unemployment rate has fallen slowly to 6.7%. The current unemployment rate is also high relative to most forecasts of its expected long-run level.

Kocherlakota said he personally expected that over the long run, the unemployment rate will converge to just over 5%. In his view, an unemployment rate of 6.7% means that the U.S. labor market is far from healthy. However, he does believe that the current unemployment statistics, troubling as they are, tend to overstate the degree of improvement in the U.S. labor market.

Kocherlakota goes on to explains why. Find out more in the next part of this series.

Continue to Part 7

Browse this series on Market Realist: