Federal Reserve Chair Janet Yellen recently noted two salient facts about the labor market that tomorrow’s jobs report won’t change:
The labor market has achieved considerable progress over the past several years. Even so, further improvement in labor market conditions would be welcome because we are probably not yet all the way back to full employment.
Of course, “full employment” isn’t a statistic you’ll find in tomorrow’s jobs report. The Fed’s statement of its longer run goals and monetary policy strategy acknowledges that its assessment of the unemployment rate consistent with its policy goal of maximum employment is based on a number of factors and that that assessment is “uncertain and subject to revision.”
The unemployment rate has fallen substantially from its peak, as shown in the chart below from our Legacy of the Great Recession chart book (which we’ll update tomorrow with the new numbers). Indeed, the unemployment rate is closing in on the Fed’s current estimate of its sustainable long-run rate of 4.9 percent.
Two things are notable about that estimate. First, it’s a recent downward revision of the estimate of between 5.2 and 5.5 percent that the Fed was using earlier this year. Second, it’s still higher than the lowest unemployment rate achieved in the later stages of each of the last two recoveries.
Three indicators about the labor market recovery to watch for in tomorrow’s report:
With low inflation and a still incomplete labor market recovery, an important consideration is whether it’s a better policy to test if current estimates of the sustainable long-run unemployment rate might still be too high rather than to start raising interest rates anytime soon.