There was a time when the unemployment rate was good enough.
It was long ago -- way back before the recession -- in an economy that now feels very far away. In that parallel universe, measuring the share of the workforce that was looking for a job was a perfectly acceptable way of determining the health of the country’s labor market. A high unemployment rate was bad. A low unemployment rate was good. Pretty straightforward.
But that number has gotten a lot murkier since the Great Recession. A falling unemployment rate might be bad if it’s the result of people dropping out of the workforce because they’re given up hope of finding a job. A rising unemployment rate might be good if it means a strong economy is encouraging workers to start looking again.
So economists began looking for better ways to measure the strength of the job market. And they soon realized that one statistic wasn’t going to cut it. Federal Reserve Chair Janet Yellen cited several more in a speech last year, including the number of jobs being created, the rate at which workers voluntarily quit their jobs, and the size of the labor force.
Since then, the list has grown even longer. Speaking last week in Jackson Hole, Wyo., Yellen pointed to an index boasting 24 indicators developed by Kansas City Fed economists Craig Hakkio and Jonathan Willis as a useful guide to labor market.
This new toolslices and dices the numbers to come up with two readings of the job market: the level of activity and the level of momentum. The former tells you how things stand, while the latter gives you a sense of where things are going. And both point to the middle of next year for a return to historical norms.
As you can see in the chart, labor market activity has picked up significantly since the recession—but still remains far below any point prior to 2008. The good news is that momentum is near the highest point than it’s ever been, which bodes well for the future.
The economists say their index shows the unemployment rate should actually be 7.1 percent, almost a percentage point higher than the current level of 6.2 percent. In other words, the jobless rate right now is deceptively low.
On the flip side, the index also suggests the unemployment rate overstated how bad things got. Instead of topping out at 10 percent in 2009, it should have clocked in closer to 9 percent.
This index is not the final word in labor market measurement, however. The staff at the Fed’s board of governors crafted a similar index using 19 indicators, and private economists have created their own versions. And yet the conclusion at which they all arrive is the same one that many Americans know in their guts, without the help of higher-level math: This recovery is making progress, but it isn't there yet.