Latest / The Federal Reserve Podcast with Fexingo: Interest Rates, FOMC Meetings, and Monetary Policy / The Fed's Hidden Metric on Long-Term Unemployment
Transcript
- Lucas: We talk a lot about job openings and payrolls, but there's one labor-market number that doesn't get nearly as much attention, and right now it's flashing a yellow light. Luna: Which one are you thinking of? Lucas: Long-term unemployment — people who've been out of work for 27 weeks or more. The latest data show that share is climbing, even as headline job openings surged to 7.6 million in April, the highest in nearly two years. Luna: So on one hand, employers are desperate to hire. On the other, a growing pool of workers who've been sidelined for months. Lucas: Exactly. And that paradox is worth unpacking because it tells us something about the kind of labor market the Fed is navigating. The ADP report yesterday showed private payrolls grew by 122,000 in May, which was stronger than expected. But if you dig into the composition, the long-term unemployed aren't the ones filling those jobs. Luna: Right, because the longer you're out, the harder it is to get back in. Skills atrophy, networks fray, employers screen you out. Lucas: That's the concern. The Fed watches this metric because it's a signal of structural damage — not just cyclical softness. If long-term unemployment stays elevated even as the economy adds jobs, it suggests there's a mismatch between the workers available and the jobs being created. Luna: And that's the kind of thing that can keep wage growth subdued for a subset of workers, even as overall wages tick up. Lucas: Precisely. The April CPI came in at 332.4, up from 330.29, and core CPI edged higher too. So inflation is still sticky. But the Fed's dual mandate is maximum employment and price stability. If long-term unemployment is rising, that tilts the employment side of the scale. Luna: Does that make the Fed more inclined to cut rates, even with inflation above target? Lucas: It complicates the picture. The Fed funds rate is at 3.63 percent effective, and the market sees cuts coming. But the 10-year breakeven inflation rate just dipped to 2.38 percent, which suggests the bond market thinks inflation will moderate. If the Fed sees long-term unemployment as a structural problem, they might argue that rate cuts won't fix it — you need fiscal policy or retraining programs. Luna: But they also can't ignore the human cost. People stuck out of work for six months or more start to detach permanently. Lucas: Right, and that's the 'economic scarring' effect. Research shows that long unemployment spells reduce lifetime earnings, and they increase the risk of dropping out of the labor force entirely. The Fed doesn't have a direct tool for that, but their rate decisions affect the overall demand environment. Luna: So what's the current number? How many long-term unemployed are we talking about? Lucas: The latest data from the Bureau of Labor Statistics shows that about 1.5 million people have been unemployed for 27 weeks or more, and that number has been trending up. As a share of total unemployment, it's around 22 percent — back near levels we saw in the aftermath of the 2008 recession. Luna: That's significant. And it's happening even though job openings are high. That mismatch is exactly what you described. Lucas: And it's happening alongside other structural shifts. The U.S. just proposed fresh tariffs on 60 economies over forced labor trade practices. That could reshape supply chains and affect which jobs are available. Meanwhile, the Iran conflict continues to roil energy markets, which feeds into inflation. Luna: So the Fed has to weigh a lot of crosscurrents. Sticky inflation, high job openings, rising long-term unemployment, geopolitical risks. Lucas: Exactly. And that's why their next move isn't obvious. The market is pricing in rate cuts, but Fed speakers have been cautious. They're watching the long-term unemployed data closely because it's a leading indicator of labor market health that isn't captured by the unemployment rate alone. Luna: The unemployment rate is still low — around 3.8 percent — but that masks the fact that the labor force participation rate hasn't fully recovered. Lucas: Right. And the long-term unemployed are a subset of that. If they start dropping out, the unemployment rate could stay low even as the economy weakens. That's the 'hidden slack' the Fed has talked about. Luna: So what would the Fed need to see to change course? A sustained decline in long-term unemployment, or a clear signal that inflation is coming down? Lucas: I think they'd need to see both, honestly. The 10-year breakeven at 2.38 is encouraging, but core PCE is still running above 2.8 percent. If long-term unemployment keeps rising and inflation moderates, that strengthens the case for a cut. But if inflation stays sticky, they'll hold. Luna: It's a tough spot. And this kind of granular data — the long-term unemployed — is exactly the sort of thing that doesn't make headlines but matters a lot. Lucas: That's why we dig into it here. And speaking of that, if walking through the economy with us has made something click for you, we'd appreciate it if you considered supporting the show. Luna: Yeah, a couple of dollars a month genuinely makes a difference. It's what keeps these episodes coming without ads. Lucas: You can find us at buy me a coffee dot com slash fexingo. No pressure, but if you've gotten something out of it, we'd be grateful. Luna: And we'll keep bringing you this kind of analysis. So back to the labor market — one more thing I wanted to ask. Lucas: Go ahead. Luna: How does this long-term unemployment data compare to what we saw during the pandemic? Because that was a massive spike. Lucas: Good question. During the pandemic, long-term unemployment peaked at over 4 million in early 2021. So we're nowhere near that level. But the concern is that the current uptick is happening in a environment where job openings are very high. That suggests the problem isn't a lack of demand for labor overall, but a mismatch. Luna: So it's more structural than cyclical this time. Lucas: Exactly. And structural problems require different solutions. The Fed can't retrain workers or fix geographic mismatches. What they can do is ensure that the economy doesn't tip into a recession that would make it worse. Luna: So keeping rates steady might be the best they can do for now, even if that means long-term unemployment stays elevated a bit longer. Lucas: That's the trade-off. And it's one they'll be debating at the next FOMC meeting. We'll be watching the long-term unemployed number when the jobs report comes out on Friday. Luna: We'll be here for it.