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<\/a>\u201cAccording to some people at the Fed, we are already fully employed,\u201d said BBVA Compass economist Shushanik Papanyan, a former Dallas Fed consultant. \u201cIt means that going below this full employment number will put more inflationary pressure on the economy, so inflation rate should be increasing faster from now on.\u201d She declared that this scenario could be \u201cproblematic\u201d as the central bank might struggle to maintain stable prices.<\/p>\n
\u201cBut it\u2019s all very subjective, and that\u2019s why we need to look at the bigger picture instead of just following any mechanical rule,\u201d Papanyan added.<\/p>\n
The latest price index for personal consumption expenditures, which is the Fed\u2019s preferred inflation measure, rose only 0.2 percent in January from a year earlier.<\/p>\n Despite the significantly declining unemployment rate, Chicago Fed President Charles Evans, one of the most dovish members of the Federal Open Market Committee, opined that the degree of labor market slack \u201cmay be somewhat larger\u201d than most other FOMC participants think. He estimates the new \u201cnormal, sustainable unemployment rate\u201d should be \u201csomething more like 5 percent,\u201d compared with the majority FOMC participants\u2019 estimates of 5.2 percent to 5.5 percent.<\/p>\n \u201cThere has been a lot of improvement recently, and given the outlook for the GDP growth over the next two years, I think the labor market will continue to improve,\u201d Evans declared after recent speech. \u201cMost of my attention now is to improve our inflation to the 2 percent target level.\u201d<\/p>\n Yellen has \u201ca dashboard of\u201d economic indicators that she frequently talks about to emphasize the slack in the labor market. In a speech she delivered in March 2014, Yellen laid out four forms of evidence for slack beyond the unemployment rate or payrolls figures: the large number of \u201cpeople who are working part-time but would like a full-time job,\u201d the behavior of the participation rate, which is \u201cthe proportion of working-age adults that hold or are seeking jobs,\u201d the \u201cextraordinarily large share of the unemployed who have been out of work for six months or more,\u201d and wage stagnation.<\/p>\n Unlike the conventional unemployment rate, the U6 measure of unemployment includes unemployed people who are working part-time because of slack work or business conditions, thus part-time work is their only option. These individuals are usually referred to as working part-time for economic reasons.<\/p>\n To Fabian Lange, professor of economics at McGill University, the number of people who work part-time for economic reasons is still \u201crelatively large,\u201d but it is \u201cno longer a big issue as the number will continue to decline with the unemployment rate.\u201d<\/p>\n The labor force participation rate takes into account of people who are working and those who are actively looking for jobs. At 62.8 percent in February, the labor force participation has hovered near a 37-year-low for 11 months.<\/p>\n Matthew Notowidigdo, associate professor of economics at Northwestern University, said the labor force participation rate tells him \u201cthe labor market hasn\u2019t completely recovered.\u201d<\/p>\n Yellen said, \u201cparticipation falls in a slack job market when people who want a job give up trying to find one.” In February, 62.8 percent of the working-age population was in the labor force, compared with 66 percent when the recession began. Notowidigdo said there is no consensus among labor economists on why more people do not want to get a job. He suggested that demographics and structural changes, specifically, the \u201cdrastically reduced manufacturing jobs since 2000,\u201d could account for the trend.<\/p>\n Similarly, to John Cochrane, professor of finance at the University of Chicago Booth School of Business, the worst prospect about the current labor market is \u201cthe large number of people who aren\u2019t even looking for jobs\u2014they have kind of given up.\u201d<\/p>\n Addressing the troublesome labor force participation, which has been declining by 0.08 percentage point per year between 1997 and 2007, and its\u00a0suggestion of\u00a0slack in the labor market, researchers at\u00a0the Chicago Fed attribute the trend to demographics, as \u201cthe oldest baby boomers hit their late fifties and began to exit the labor force.\u201d According to their study, falling youth labor force participation for both genders contributed -0.09-percentage point per year to the change during 1997 to 2007. Since 2007, both patterns have intensified \u2013\u201cwith the trend LFP rate falling by roughly 0.3 percentage points per year.\u201d<\/p>\n The number of Americans participating in the labor force has been on a decline for years. That helps explain the low unemployment rate\u2014the government simply excludes millions of long-term unemployed workers from the labor force.<\/p>\n Instead of focusing on the unemployment rate, Mark Witte, professor of economics at Northwestern University, suggested the employment-population ratio gives a \u201cmuch more comprehensive picture\u201d about the job market. It is a measurement of employed people as a percentage of the entire adult civilian population.<\/p>\n <\/p>\n Similar to the labor force participation rate, the employment-population ratio does not suffer from underestimation problems attributable to unemployed persons that enter and exit the labor force. For example, when discouraged workers leave the labor force, the unemployment rate goes down, but not the employment-population ratio.<\/p>\n \u201cThe unemployment population is still very low,\u201d Witte remarked. \u201cSo one could argue there\u2019s a lot of slack in the economy and a lot of growth is still possible. We have a lot of quarters ahead of us of strong growth.\u201d<\/p>\n Cochrane, of the University of Chicago,\u00a0noted that, although a lot of people \u201cwho were out of work for a couple of weeks can quickly get jobs,\u201d there is \u201ca core of people who are unemployed and have been unemployed for a long, long time.\u201d<\/p>\n The long-term unemployment rate accounts for people who are out of work for more than six months and are actively searching for a job. Those who are underemployed, such as part-time workers looking for full-time jobs, are not included.<\/p>\n Lange stated that the high hire rate does not address the issue of long-term unemployment. \u201cMost of the job creation over the past six years was formed from the pool of new entrants into the labor market and those short-term unemployed,\u201d he added.<\/p>\n Lange and Notowidigdo, along with two other labor economists, published\u00a0research in June on the persistence of the low flows of people from unemployment to employment in the aftermath of the Great Recession. The research showed that \u201ca strong negative labor demand shock\u201d such as a major financial crisis could build up the \u201cstock of the long-term unemployed,\u201d because \u201cthe longer one has been unemployed, the less likely one is to get a callback from an employer and job search effort also is likely to decline.\u201d Ultimately, the \u201coverall matching efficiency of labor market is reduced when the incidence of long-term unemployment is high.\u201d<\/p>\n Although long-term unemployment has not returned to the pre-recession level, John Challenger, CEO of the outplacement and career services firm Challenger, Gray & Christmas Inc., has a much more optimistic point of view about the labor market. He pointed out that the long-term unemployment rate had a \u201c20-percent drop\u201d\u00a0during 2014. \u201cThat\u2019s a significant drop in a year,\u201d he said. \u201cThe long-term unemployed accounted for only less than a third of the pool of unemployed people, whereas a year ago, it was 35.6 percent.\u201d<\/p>\n \u201cSo more of the long-term unemployed people are finding jobs,\u201d Challenger asserted.<\/p>\n \u201cIf you are not happy with today\u2019s labor market, or at least partly happy, then it\u2019s almost like you can never be happy, because there are so many good things happening,\u201d Challenger declared. \u201cBut the big concern is that wages have not gone up as much as economists would expect.”<\/p>\n The average hourly wage in January 2015 was $24.75, up by only 53 cents from a year ago. \u201cThe wage for college-educated workers has gone up quickly, but that for low skilled or semiskilled workers has been very low,\u201d Challenger noted.<\/p>\n \u201cThe average wages haven\u2019t really gone up much for the last couple of years,\u201d Notowidigdo said. He suggested \u201cthe increasing trade with China and technical changes that reduced need for labors\u201d could have contributed to the stagnating wages.<\/p>\n<\/a>What do\u00a0other economists think of Yellen’s methodology? There’s considerable agreement.<\/h3>\n
Reason No.1: \u201cpeople who are working part-time but would like a full-time job\u201d<\/strong><\/h5>\n
<\/a><\/a><\/a>Reason No. 2: the low labor participation rate and the large proportion of \u201cworking-age adults that hold or are seeking jobs\u201d<\/strong><\/h5>\n
<\/a><\/p>\n<\/a>\u00a0Reason No. 3: the \u201cextraordinarily large share of the unemployed who have been out of work for six months or more\u201d<\/strong><\/h5>\n
<\/a>Reason No. 4: the wage stagnation<\/strong><\/h5>\n
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