Latest / The Federal Reserve Podcast with Fexingo: Interest Rates, FOMC Meetings, and Monetary Policy / The Fed's Hidden Labor Market Indicator Nobody Talks About
Transcript
- Lucas: The May jobs report drops Friday, and everyone will be looking at the top-line payroll number — how many jobs were added, what the unemployment rate did. But there's a quieter number in the household survey that the Fed has been watching very carefully, and it's not getting the attention it deserves. Luna: Which one? The participation rate has been pretty stable, around 62.5 percent. Lucas: Not exactly. I'm talking about the duration of unemployment — specifically, the share of unemployed workers who have been out of work for 27 weeks or longer. That's the long-term unemployment rate, and it's been creeping up in a way that should grab the Fed's attention. Luna: Right, because the headline unemployment rate can be misleading if a lot of those unemployed have been jobless for a long time. Lucas: Exactly. You can have a low overall unemployment rate, but if the composition shifts toward long-term unemployment, that tells you something different about labor market slack. People who have been out of work for six months or more tend to have a harder time re-entering — their skills atrophy, they get discouraged, employers screen them out. The Fed sees that as a sign that the labor market isn't as tight as the headline number suggests. Luna: So what has the data been showing? I know the latest JOLTS report had job openings at 7.6 million, which is still high. Lucas: Right, openings are elevated, but the long-term unemployed number has been ticking up. As of the latest data, the number of workers unemployed for 27 weeks or more is approaching levels we haven't seen since the aftermath of the 2008 financial crisis — not in percentage terms, but in absolute numbers. It's now over 1.5 million, and the share of total unemployment that's long-term has risen above 20 percent. Luna: That's significant because during the tight labor market of 2022 and 2023, that share was much lower — around 15 percent. Lucas: Right. And the Fed pays attention to this because it's a lagging indicator, but it also feeds into wage dynamics. If you have a pool of long-term unemployed that isn't shrinking, that suggests there's structural mismatch — skills, geography, industry shifts — and it means the labor market isn't as frictionless as you might think. That can put a ceiling on wage growth, because employers don't feel as much pressure to bid up wages if there's a stock of workers who are available but not quite matching what they need. Luna: So if the Fed sees long-term unemployment rising, they might be less worried about wage-push inflation? Lucas: Exactly. The Phillips curve relationship has been unreliable, but this is one of those nuances that the Fed's research staff pores over. If the share of long-term unemployed is rising, the Fed can interpret that as a sign that the labor market has more slack than the 4 percent unemployment rate suggests. And that gives them more room to hold rates steady — or even cut — without fearing that it will reignite inflation. Luna: It's interesting because markets tend to focus on the monthly payrolls number and the unemployment rate, but the Fed is looking at the composition. Lucas: And that's the thing — you can get a payrolls number that's in line with expectations, the unemployment rate holds flat, and the market says 'everything's fine.' But if you dig into the household survey, you see the share of people unemployed for 27 weeks or more rising. That's not a headline that moves the S&P 500 in real time, but it feeds into the Fed's summary of economic projections. It's one of those data points that shapes the dots. Luna: Is there any recent research from the Fed on this? I recall some of the regional Fed banks have done work on long-term unemployment scarring. Lucas: Yes, the San Francisco Fed published a note last year on the hysteresis effects of long-term unemployment — basically, how prolonged joblessness can permanently reduce labor force participation and potential output. And the New York Fed has looked at how the duration of unemployment affects wage growth expectations. The bottom line is that it's not just a social issue; it's a macroeconomic one with implications for the neutral rate of interest. Luna: So when the May jobs report comes out Friday, what should we be looking for specifically in the long-term unemployment data? Lucas: I'd look at two things. First, the month-over-month change in the number of people unemployed for 27 weeks or more. If it rises by more than 100,000, that's a notable acceleration. Second, the share of long-term unemployed as a percent of total unemployment — if it breaches 25 percent, that would be the highest since 2014. The Fed will be watching both. Luna: And if the data shows that trend continuing, what does that mean for the July FOMC meeting? Lucas: If the May report shows payrolls around 200,000 or so, unemployment steady at 4 percent, but long-term unemployment rising sharply, I think the Fed would feel more comfortable signaling a cut later this year. Because they'd see the labor market as softer than the top-line numbers imply. Chair Powell has mentioned in press conferences that they look at a 'broad set of labor market indicators,' and this is one of those that doesn't get much airtime but is very much on their radar. Luna: So really, the long-term unemployed are a kind of canary in the coal mine for the Fed. Lucas: Exactly. And it's a canary that's been chirping a bit louder over the past six months. The question is whether the markets start paying attention, because right now the bond market is pricing in a pretty benign outlook. The ten-year yield is at 4.48 percent, which suggests traders aren't too worried about a recession, but also not expecting aggressive cuts. If the long-term unemployment data keeps deteriorating, that could shift the narrative. Luna: You know, it reminds me of something I read about the 2010s — after the Great Recession, long-term unemployment stayed elevated for years, and the Fed kept rates near zero partly because of that slack. It's like we're seeing a milder version of that pattern now. Lucas: Yeah, it's not as extreme, but the analogy holds. The Fed learned from that experience that the labor market can look healed on the surface while still having deep structural issues underneath. And they've been more willing to be patient because of that memory. Luna: So if someone is listening and wants to keep tabs on this indicator, where should they look? The BLS website has the data in Table A-12, right? Lucas: Exactly — Table A-12 of the Employment Situation Summary. It breaks down unemployment by duration. It's not a flashy number, but it's one of those that really tells you how the labor market is functioning beneath the surface. And for anyone who wants to understand what the Fed is actually looking at, that table is more revealing than the top-line unemployment rate. Luna: And that's the kind of thing that makes this show worthwhile — digging into the details that matter. If you've been following along and getting something out of these conversations, consider throwing a couple of dollars our way on buy me a coffee dot com slash fexingo. It genuinely helps keep this ad-free and focused on the real data. Lucas: Yeah, it's a small gesture that makes a big difference for us. So back to that Friday jobs report — we'll be watching Table A-12 as closely as the payrolls number. I think that's where the real story might be. Luna: Well, we'll have the data on Friday, and we'll be back to break it down. Thanks for listening, and we'll see you next time. Lucas: Take care.