The unemployment rate is an oft-cited gauge of labor market health. But how good of a gauge is it? An article in The Regional Economist compared the unemployment rate with a few recently developed indexes designed to measure “labor market conditions” or “labor market health.”
Maximiliano Dvorkin, an economist with the Federal Reserve Bank of St. Louis, looked at the unemployment rate with labor market conditions indexes created by the Federal Reserve Board of Governors and the Federal Reserve Bank of Kansas City in 2014. He found that, “despite some differences in their construction and the variables used, the three indexes that I reviewed seem to provide essentially the same information. This similarity is not surprising since they are, after all, trying to capture the same object, namely the general health of the labor market.”
The index developed by the Board of Governors uses 19 labor variables (measured monthly) of the U.S. economy. The index goes back to July 1976 and reports in average monthly changes, rather than index levels.
The Kansas City Fed developed two indexes, both using 24 variables (also measured monthly) and starting in January 1992. The first index is interpreted as the level of conditions in the labor market, and the second reflects the momentum, or changes, in these conditions.
Dvorkin compared the indexes and the unemployment rate by both the changes in labor market conditions and the level of labor market conditions. He said it was evident that the unemployment rate and the indexes are highly synchronized.1 He noted, “While nothing in the statistical procedure behind the indexes imposes this strong link between them and the unemployment rate, the data suggest that the unemployment rate is very informative of the underlying conditions in the labor market.”
He concluded, “A closer inspection of the figures suggests that this strong link between the indexes and the unemployment rate does not appear to have changed recently, which suggests that the unemployment rate is still as good at measuring labor market conditions as it has been in the past.”
1 For a more detailed explanation of Dvorkin’s analysis and to see the charts used in the analysis, see the article “Assessing the Health of the Labor Market: The Unemployment Rate vs. Other Indicators.”