Janet Yellen, the new Federal Reserve Chair, spoke to the House Financial Services Committee Tuesday morning about the economy. Much of her testimony echoed her predecessor, Ben Bernanke, but she mentioned a key point in regards to the labor market.

             We must understand the “importance of considering more than the unemployment rate when evaluating the condition of the U.S. labor market,” Yellen said.

Source: Bureau of Labor Statistics

The Bureau of Labor Statistics recently released a report on January’s unemployment rate, which fell to 6.6 percent in January 2014 from 6.7 percent in December 2013, the lowest it’s been in years. Since our unemployment rate is the best gauge for the health of the labor market, this is great news, right? Yes, and no, since the unemployment rate is not the only information we should consider.  We have to consider some other aspects of the labor market, like:

  • Underemployment. Yellen mentions the number of underemployed workers who are not considered in the unemployment rate. These are people who have part-time jobs, but want full-time jobs.
  • The rate of job creation. According to the BLS, January saw a job gain of 113,000, higher than the 75,000 job gain in December, but much smaller than the average of 194,000 jobs a month in 2013. This raises the question, why is the unemployment rate decreasing if we haven’t added many jobs?
  • The labor force participation rate. This is the percentage of citizens in the labor force in the overall population. A low labor force participation rate could cause the unemployment rate to decrease artificially. Economists argue that the low labor force participation rate of 63 percent could be credited to a couple of different factors:

    Source: Bureau of Labor Statistics
  1. Discouraged Workers– economists argue that the low labor force participation rate is due to people who have given up looking for work, but would rejoin the job market given the opportunity.
  2. The Retirement of Baby Boomers– some economists say that the large number of retiring baby boomers is causing the low labor participation rate.

If the labor force participation rate is due to a large number of discouraged workers, then the unemployment rate is actually a lot higher than it seems. However, if it’s mainly due to retiring baby boomers, the low labor force participation rate isn’t an issue. No matter what, an unemployment rate of 6.6 percent is still above the optimum level for maximum sustainable employment. Furthermore, many of the unemployed have been out of work for 6 months or more.

Do you know anyone who has left the labor force as a discouraged worker? Have you retired from the labor force?