Full Employment May Be Redefined as Trump Attacks U.S. Benchmark

Just as the U.S. nears full employment based on the principal measure used for almost eight decades, President Donald Trump and his team are looking at new yardsticks.

The jobless rate probably held in January at 4.7 percent, according to the median estimate from economists ahead of Friday’s Labor Department report. Federal Reserve policy makers see such a level — which is down from a post-recession high of 10 percent in 2009 — as being at or near full employment, meaning anything lower would push inflation higher.

While the rate’s use as a chief indicator dates to the Depression era, Trump spent last year’s election campaign calling the measure “phony” and arguing it overstates the strength of the labor market. More recently, his Treasury secretary nominee, Steven Mnuchin, said the number has “excessive influence” over policy and that it fails to account for people who have dropped out of the labor force or aren’t actively looking for work. White House spokesman Sean Spicer said Trump’s economic team will look at a “multitude of statistics” in assessing labor-market strength.

Trump’s officials actually share common ground with Fed Chair Janet Yellen on their support for reviewing a range of labor-market indicators. Yellen has argued in the past that the jobless rate didn’t capture slack evident elsewhere, as the Fed kept interest rates near zero until late 2015. She’s pointed to low levels of labor-force participation and the large number of part-time workers who would prefer full-time employment.

Fed policy makers indicated in their post-meeting statement Wednesday that there’s still room for improvement in the job market. While the unemployment rate “stayed near its recent low” in December, “some further strengthening” is expected in labor conditions.

Comparable Rates

That doesn’t mean central bankers or Labor Department economists are about to abandon the unemployment rate as their main gauge. That figure is the “number that’s most comparable over time and one that’s most comparable internationally,” said former Bureau of Labor Statistics Commissioner Erica Groshen, who left the government last month at the end of her four-year term as President Barack Obama’s appointee to the post.

Mnuchin, in written responses to senators’ questions following his confirmation hearing last month, cited the so-called U-5 rate as an alternative indicator. That rate, which stood at 5.7 percent in December, includes discouraged workers as well as a group called marginally attached workers, who aren’t working or actively looking for work but want a job. Another measure, the U-6 or underemployment rate, was 9.2 percent in December. It also includes part-time employees who want full-time work.

“People change their minds about whether they’re discouraged,” said Groshen, who was previously a Fed economist. “We’ve been measuring the unemployment rate the same way since the 1940s. Most other countries that have an unemployment rate use a definition that’s similar to ours — partly because we created it and because it works.”

While other measures can help give a more nuanced view of the labor market, they don’t go back as far, Groshen said.

Changing the target unemployment rate “would just say to me that you’re confused, that you don’t know what you’re aiming for,” said John Silvia, chief economist at Wells Fargo Securities LLC in Charlotte, North Carolina.

Payrolls, Wages

Friday’s report is projected to show a steadily improving labor market, according to economists’ estimates. Employers probably added 175,000 workers to payrolls in January, an improvement from December, while average hourly wages probably rose 2.8 percent from a year earlier, compared with the 2.5 percent rise in January 2016.

U.S. efforts to define and measure unemployment stemmed from the Great Depression, when about 13 million people were out of work, amounting to a 25 percent jobless rate. But no one knew these figures at the time or whether they were improving or deteriorating, according to a 2009 paper by BLS economist Steven Haugen.

Researchers devised the methodology, and the monthly employment report began in 1940, based on a regular sample survey of the population. That practice continues today, with about 60,000 U.S. households surveyed each month by the Census Bureau. Payroll figures come from a separate survey of businesses and government agencies.

Since 1940, there have been various reviews of the concept and definition of unemployment, which have resulted only in minor revisions to the official measure, Haugen wrote. A range of alternative metrics, including the U-5 and U-6 rates, were developed in the 1970s.

Such measures now show that the “labor market is tightening,” said Neil Dutta, head of U.S. economics at Renaissance Macro Research LLC in New York.

Political Influence

While the BLS commissioner participates in the drafting of the monthly employment release and approves it, other political appointees aren’t involved, and long-standing guidelines are aimed at avoiding the politicization of the reports, Groshen said. Trump hasn’t named a new BLS chief yet. The position is subject to Senate confirmation.

If the focus is placed on a rate that measures unemployment differently, what would matter is that “you use it consistently over time, both backwards and forward,” said Stuart Hoffman, chief economist at PNC Financial Services Group Inc. in Pittsburgh.

Among people out of the workforce, “it’s hard to know how many are legitimately would-be employees,” Hoffman said. Still, “there are people on the sidelines that could come back in, who keep the labor market from being all that tight.”

“The spigot keeps twisting a little tighter, but it’s not bone-dry,” he said.

Bloomberg

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell
Dean Popplewell

Latest posts by Dean Popplewell (see all)