Yellen’s labor market dashboard

Genevieve Signoret & Patrick Signoret

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Summary: Janet Yellen’s “dashboard” is a set of labor market indicators that the Fed is watching closely to assess the state of the recovery and decide when to start normalizing monetary policy. The dashboard includes, besides nonfarm payroll growth and the official unemployment rate, a broader measure of unemployment that includes underemployed and discouraged workers (U-6), long-term unemployment, labor participation, job openings, quits, hires, and wage growth. All these numbers are estimated by the Bureau of Labor Statistics in its monthly employment situation and job openings and labor turnover reports. Bloomberg follows most of them in its Yellen dashboard page. The New York Fed graphs them all and several more in its labor conditions page.

For several months, Yellen and other Federal Open Market Committee (FOMC) members had been saying that unemployment and nonfarm payrolls weren’t the only relevant indicators in their assessment of the state of labor market. Then, on March 19, in her press conference, Yellen laid out in detail what other indicators she’s watching and why (bold face is ours):

So I have talked in the past about indicators I like to watch or I think that are relevant in assessing the labor market. In addition to the standard unemployment rate [U-3], I certainly look at broader measures of unemployment. I mentioned U-6 in my statement. It—5 percent of the labor force working part time on an involuntary basis, that’s an exceptionally high number relative to the measured unemployment rate, and it—so, to my mind, is a form of slack that is—adds to what we see in the normal unemployment rate and is unusually large. However, it is coming down, as well as U-3. It’s moving in the right direction and has moved even more recently than U-3. Of course, I watch discouraged and marginally attached workers. The share of long-term unemployment has been immensely high and can be very stubborn in bringing down, that’s something that I watch closely. Again, that remains exceptionally high, but it has come down from something like 45 percent to high 30s, but that’s certainly on my dashboard. Labor force participation—I do think most research suggests that due to demographic factors, labor force participation will be coming down, and there has been a downward trend now for a number of years. But I think there is also a cyclical component in the fact that labor force participation is depressed. And so, it may be that as the economy begins to strengthen, we could see labor force participation flatten out for a time as discouraged workers start moving back into the labor market. And so that’s something I’m watching closely.

In the Committee, we’ll have to watch—there are different views on this within the Committee, and it’s hard to know definitively what part of labor force participation is structural versus cyclical, so it’s something to watch closely. I’ve also mentioned, in the past, measures of labor market turnover. You mentioned quits. A remarkably large share of workers quit their jobs every month, usually going directly into another job. And I take the quit rate in many ways as a sign of the health of the economy. When workers are scared they won’t be able to get other jobs, they show a reduced willingness to quit their jobs. Now, quit rates now are below normal pre-recession levels, but on the other hand, they have come up over time, and so we have seen improvement. The job opening rate has also come up. The hires rate, however, remains extremely depressed, and I take that as a sign of a weaker labor market. But most of these measures, although they don’t paint the identical extent of improvement, if you ask about my dashboard, the dial on virtually all of those things is moving in a direction of improvement.

The final thing I’d mention is wages, and wage growth has really been very low. I know there is perhaps one isolated measure of wage growth that suggests some uptick, but most measures of wage increase are running at very low levels. In fact, with the productivity growth we have and 2 percent inflation, one would probably expect to see, on an ongoing basis, something between—perhaps 3 and 4 percent wage inflation would be normal. Wage inflation has been running at 2 percent. So not only is it depressed, signaling weakness in the labor market, but it is certainly not flashing. An increase in it might signal some tightening or meaningful pressures on inflation, at least over time. And I would say we’re not seeing that.