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Fed Paper Confirms the Labor Market Measures are Worse

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EDITOR NOTE: Sometimes conventional measures just don’t line up neatly. You’d like to “check the boxes,” so to speak, to confirm that something is happening according to normal expectations. But sometimes the boxes checked and unchecked are screaming extremely divergent signals. The Fed is looking to raise interest rates once a 2% inflation average and maximum employment are achieved--the latter, a lookout for wage inflation. Yet, how is it possible that the labor market is “tight” with around ten million job openings when there is nearly that same number of employable “unemployed”? So, is it tight or is it slack? That’s the “check the box” scenario I mentioned above, and the Fed is having a hard time with it. Because the labor market is neither tight nor slack--it’s, ironically, both at the same time. And that spells problems for the Fed. Hence, they just suggested in a recent paper that the labor market measures are much worse than they appear. Another unprecedented scenario.

SAN FRANCISCO (Reuters) - U.S. labor market signals are conflicting to an "unprecedented" degree, but those suggesting labor market slack should be given more weight than those pointing to tightness, according a paper published Monday by the San Francisco Federal Reserve Bank.

The paper looked at 26 labor market measures that typically move in tandem and found that during the current recovery they are giving wildly divergent signals about the health of the job market.

The job openings rate, for instance, suggests the job market is much tighter than the unemployment rate; the labor force participation rate points to much more slack than detected in the unemployment rate.

Because the pandemic has forced so many people out of the workforce, "negative signals such as the low labor force participation rate provide a better read than do the positive signals," the researchers argued. "Overall, our findings reveal that the labor market situation is worse than some headline numbers suggest."

U.S. central bankers are debating how tight the U.S. labor market has become amid widespread reports from employers about hiring difficulties even as the economy still has 8 million fewer people working than before the pandemic.

The question matters because the Fed says it could start reducing its support for the economy once inflation and the labor market have made "substantial further progress" toward the Fed's goals of 2% inflation and maximum employment. It hasn't, however, laid out exactly how it will measure that progress.

The U.S. unemployment rate was 6.1% in April and a reading for May is due out on Friday.

Original post from Yahoo!Finance

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