Banking

The Federal Open Market Committee's (FOMC) September decision to purchase additional bonds differs importantly from earlier rounds of monetary easing. The commitment to purchase securities in the most recent case comes with an open-ended time frame.

The FOMC in its September 13 statement said it would continue purchasing agency mortgage-backed securities and employing other policy tools until the outlook for the labor market "improve[s] substantially."

But just what does substantial improvement in the jobs outlook mean? That is the question Federal Reserve Bank of Atlanta President Dennis Lockhart explored in a November 1 speech to the Chattanooga Downtown Rotary Club. "Arriving at an answer," Lockhart said, "is not so straightforward."

Labor market is hugely complex
For starters, the U.S. labor market is complex and dynamic. About 17 million people change their employment status every month—they find a job, lose a job, start looking for a job or leave the labor market, and so on.

What's more, having a job can mean different things. Someone can work full-time, part-time, or have a temporary or contract job, Lockhart pointed out. Right now, about 115 million people hold full-time jobs, 7 million fewer than before the recession. Another 28 million work part-time, 3 million more than before the recession.

A third aspect of labor market fluidity is the changing rate of labor force participation. Since the early 2000s, fewer people have been in the labor force, which includes people working and looking for work.

A framework for "substantial improvement"
Amid this complexity, Lockhart laid out a framework for defining "substantial improvement." "The starting point certainly should be the headline unemployment rate and the payroll jobs number," he said.

In addition, he would look for sustainable improvements in other metrics, including:

• lower unemployment rates caused by more job seekers finding jobs as opposed to people dropping out of the labor force
• growing numbers of people entering the labor force and
• employment gains that are associated with reductions in underemployment, such as more people working full-time rather than part-time.

"In my view," Lockhart concluded, "it's desirable to put more definition around the term ‘substantial improvement' since so much rides on the Committee's assessment of that economic milestone."

November 20, 2012