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By HaleStewart February 12, 2014 8:20 am
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Yellen To Use Broader Measure of Employment For Fed Decisions

Yesterday was Janet Yellen's first offical testimony before Congress as the new head of the Fed.  And while most of her testimony displayed a fair amount of continuity from the Bernanke years, there is one broad change: the Fed's usage of a broader measure of unemployment to determine Fed policy.

The US has many unemployment measures, but the most popularly reported is the unemployment rate.  This number is derived from the household survey and it simply divides the number of unemployed by the civilian labor force to arrive at a simple ratio.  However, there are other measures that show the nuances of the labor market.  While these aren't reported as widely as the unemployment rate, they are just as importance.

For example, there are statistics that show the duration of unemployment.  THe BLS breaks these down into unemployed for less than 5 weeks, 5-14 weeks unemployed, 15-26 weeks unemployed and over 26 weeks unemployed.  This time around, the number of people who are unemployed for over 26 weeks is very high.  The problem for these people is the longer you're unemployed, the more likely you won't find a job.  This makes long-term unemployment a de facto sentencing to permanent unemployed status.

There are also statistics for people who are unemployed for economic reasons.  According to the BLS, "This category includes persons who indicated that they would like to work full time but were working part time (1 to 34 hours) because of an economic reason, such as their hours were cut back or they were unable to find full-time jobs."  This measures shows us the rate of labor utilization.

Indicators from the JOLTs (Jobs Opening and Labor Turnover survey) show statistics for job openings and actual hires.  This set of numbers gives us an idea of business confidence in the job market. 

The point to the above is we now need to look beyond the unemployment rate to get an idea for what the Fed sees regarding the jobs market.  All of the above numbers currently indicate there is a tremendous amount of slack in the US.  So, we can expect the Fed to keep rates low (barring an inflationary spike) for an extended time.

Hale Stewart is a former bond broker who has been writing about economics and financial markets since 2006 on the Bonddad Blog.  He is also a tax attorney with a domestic and international practice while also forming and managing captive insurance companies for US companies.   You can follow him on twitter at:@captivelawyer

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