Even as the Labor Department reported on Friday that the unemployment rate had fallen to 5.4%, it is probably an undercount. That’s not the intention, but instead stems from the long-held methodology of how the Labor Department determines who is in the labor force and who is not.
Nevertheless, the headline unemployment rate, known as the U3 rate, grabs the headlines and has become the public’s preferred measure of labor market conditions.
But when the count includes those who have become discouraged from finding work and have technically dropped out of the labor force, what we call the “real” unemployment rises to 9.1%.
There are other ways to measure undercounting as well. The Department of Labor has the U6 rate, which counts those workers who are marginally attached to the labor force and are insufficiently employed. That rate, known as the underemployment rate, stands at 9.2%.
It all has an influence on policymakers and lawmakers as they grapple helping discouraged workers and people who are marginally employed. We think it is premature to begin withdrawing monetary accommodation as fiscal aid fades into the fall and early next year.
That is especially the case when it comes to addressing gaps among ethic and socioeconomic groups, which have a tendency to grow during economic downturns like the pandemic.
As of July, the unemployment rate for white Americans dropped below 5.0%, which is consistently lower than the 7.1% unemployment rate for Latino/Hispanic Americans and the 8.8% rate for Black/African Americans. In comparison, before the pandemic, the unemployment rate for white Americans had reached as low as 3.0%, while it was 4.4% for Latino Americans and 6.0% for Blacks.
The Federal Reserve’s mandate is to maximize employment in addition to keeping inflation in check. In a reaffirmation of its “Statement on Longer-Run Goals and Monetary Policy Strategy,” the Fed said that “the maximum level of employment is a broad-based and inclusive goal” and that “policy decisions must be informed by assessments of the shortfalls of employment from its maximum.” The statement added, “The Committee considers a wide range of indicators in making these assessments.”
So as encouraging as July’s jobs report is, with the gain of 943,000 jobs, policymakers still face significant challenges in restoring the labor force to pre-pandemic levels and then to move beyond that short-term goal. That suggests that calls by financial market participants for immediate rate hikes might be out of step with the goals of the monetary authorities.
For more information on how the coronavirus pandemic is affecting midsize businesses, please visit the RSM Coronavirus Resource Center.
