Federal Reserve Building

Measuring employment

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As expected, the Federal Reserve recently increased the benchmark federal funds interest rate to 1.00%, a 0.25-percentage-point increase, its second increase since December 2016.

The Fed has a dual mandate: to maximize employment and to control inflation. Interest rates are a primary tool it uses to achieve that mandate – but how does the Fed determine when it’s time to change rates? It can be a deliberative process, and an abundance of data goes into the Fed’s decision-making, including employment data. Here are a few of the labor statistics that help shape economic policy.

  • Employment situation report is published monthly and monitors the labor market. It consists of four main statistical surveys: the unemployment rate; nonfarm payroll employment; the average number of hours worked; and average hourly earnings. On the whole, the employment situation report provides insight on wages, employment and, potentially, inflation trends.
  • U-6 underemployment rate is a broad measure of employment, designed to account for not only those not working who would like to be, but also includes those who are underemployed – part-time employees seeking full-time work – and those who have become discouraged from looking for employment.
  • Job opening and labor turnover survey (JOLTS) helps measure movement in the labor market. It tracks job openings to measure unmet labor demand; the hires rate to gauge how quickly positions are being filled, if there is unmet employer demand; the layoff/discharge rate to determine labor market demand; and the quits rate to measure workers’ willingness to leave their jobs. Combined, these statistics paint a full picture of labor market fluidity and employer/employee supply and demand.
  • Nonfarm payrolls report eliminates farm employment, usually highly seasonal, from the payroll numbers to give a more accurate picture of continual, nonseasonal employment. The major statistic the report provides is the number of additional jobs added from the previous month.
  • Atlanta Fed wage tracker measures the change in individual workers’ income on a year-over-year basis. By focusing on individual wages, the wage tracker avoids aberrant economic trends – such as higher-earning, late career Baby Boomers exiting the labor force – and produces a more consistent wage measure.
  • Employment cost index includes employer-paid benefits in its measure of wages. More than just an employment measure, however, it is also considered anticipatory of changes to the inflation rate as compensation tends to increase before companies raise consumer prices.
  • Labor force participation rate measures the number of people who are either employed or looking for work. It purposefully excludes those of working age who are not actively looking for employment (e.g., homemakers, retirees and students). The participation rate can dip during a recession as previously employed workers become discouraged and cease looking for work.
  • Weekly unemployment claims are used to analyze unemployment trends on a national, regional and state level. Unemployment rates can vary greatly by state – North Dakota and Maryland have very different economies – so a localized focus can be important to understanding the numbers.

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