Last week, the U.S. Fed released its monthly statement on monetary policy (http://www.federalreserve.gov/newsevents/press/monetary/20140319a.htm)
in Washington, D.C. Often released the day after the Federal Open
Market Committee (FOMC) meeting on interest rates, the statement created
some confusion in the market about whether the Fed will henceforth
consider the unemployment rate in setting interest rates.
Every first Friday of the month, the U.S. Department of Labor
releases data on the health of the labor market. This data includes the
unemployment rate and payrolls, i.e., the number of jobs employers
created.
Soon after the Fed statement release and the following press
conference it was in the business media that the Fed will no longer
consider the unemployment rate when setting interest rates (http://finance.fortune.cnn.com/2014/03/19/fed-unemployment-rate/).
Although i didn't listen to the press conference, I read and reread the
statement and, honestly, i didn't see anything like a ditching of the
unemployment rate in that statement. However, I'm not well-versed in Fed
Speak, so i may be lost in translation.
Nonetheless, if it is true that the Fed will now give the
unemployment rate the cold shoulder, then this is a welcome development.
Other countries may do it differently but the U.S. Department of Labor
uses a household survey to determine the unemployment rate.
This is an unreliable way to gauge the true health of a labor market.
For instance, if someone is not working but this person is for
whatever reason not looking for a job, will the survey say this person
is unemployed? I don't know if it does but it will be wrong to do so,
because a household survey can't truly capture the willingness to work.
Besides, people tend to lie a lot on surveys, especially when it's not
face-to-face.
A more reliable metric to gauge the health of the jobs market is the
non-farm payrolls, which is the number of people employers actually hired.
My Suggestion
If the Department of Labor really like surveys and insist on using
one for the unemployment rate, then i suggest they survey employers for
the number of employees they have and express this aggregate as a
percentage of the overall working-age population. This will give an
employment rate, and one minus this figure is the unemployment rate.
What do you think of my suggestion?
