Goldman Caves: "The Unemployment Rate Is An Inappropriate Measure Of The Labor Market"

Tyler Durden's picture

The second half of 2012 saw a significant shift in US monetary policy from calendar-based guidance to outcome-based guidance and the adoption of a 6.5% unemployment rate as a threshold for 'tapering'.

With Friday's better-than-expected payrolls data and another tick lower in the critical-to-liquidity unemployment rate, it seems Goldman Sachs (and others) are waking up to the facts that we have been vociferous about: the shift of jobless individuals from unemployment into inactivity (the participation rate dilemma) is making the unemployment rate a less appropriate measure of broad labor market conditions. This has important implications for Fed policy because it implies that the committee might still be quite far from reaching the jobs side of its mandate even once the unemployment rate is back at 6%.

After all, the Federal Reserve Act calls for 'maximum employment', not 'minimum unemployment'. This distinction did not matter much in the past, but it is becoming increasingly important. The 'participation gap' remains as big a drag on growth as 'unemployment' and we, like Goldman, would expect the Fed to 'change' its target for their outcome-based guidance (to enable moar printing).

Via Goldman Sachs,

The second half of 2012 saw a decisive shift in US monetary policy. One aspect was the move to open-ended asset purchases of $85 billion per month.

The other aspect - and our focus today - was the adoption of a 6.5% unemployment rate as a threshold for the first hike in the federal funds rate. The motivation for the move from calendar-based guidance to outcome-based guidance is simple and compelling. It is much more sensible for a central bank to guide expectations about future policy actions in terms of an economic criterion than in terms of a particular date.


But the 6.5% threshold for the unemployment rate is not an ideal outcome-based target.


The reason is that the unemployment rate is increasingly distorted by the decline in labor force participation.


Labor force participation has fallen by 2.7 percentage points since the start of the 2007-2009 recession.


Some of this decline is clearly related to the aging of the US population. Population aging shifts the composition of the over-16 population - which forms the denominator of the participation rate. The chart below shows that changes in the composition of the population account for 1.2 percentage points of the decline in labor force participation.

This decline is clearly structural, and it will continue at an estimated pace of about 0.2 percentage points per year for the foreseeable future.


Even if the participation decline is a consequence of the post-2007 downturn in labor demand, it might still have long-term effects. One specific concern is that we are now seeing a US version of the increase in European structural unemployment following the 1980-1982 recession. This increase established the term “hysteresis” - an extreme form of persistence in which a labor market shock is never reversed - in the lexicon of economics.

Most economists agree that the relatively easy availability of long-term jobless benefits was one key reason for the European hysteresis problem of the 1980s. So it is not surprising that the more pessimistic commentators on the US labor market outlook have focused on the Social Security Disability Insurance (SSDI) system as a potential analog to the European unemployment benefit issue. Since 2007, the number of SSDI disabled worker recipients has risen by 1¾ million, or 0.7% of the over-16 population.

Ignoring the participation rate is a mistake. Goldman's regression shows the unemployment rate and participation gap are of similar magnitudes when related to slowing growth - a 1pt rise in unemployment or the participation gap equals around a 0.16% YoY drop in wage growth


the shift of jobless individuals from unemployment into inactivity is making the unemployment rate a less appropriate measure of broad labor market conditions. This has important implications for Fed policy because it implies that the committee might still be quite far from reaching the jobs side of its mandate even once the unemployment rate is back at 6%. After all, the Federal Reserve Act calls for “maximum employment”, not “minimum unemployment.” This distinction did not matter much in the past, but it is becoming increasingly important.

The more immediate implication is that Fed officials may need to revisit their forward guidance. In principle, we see three options for what they might do, in increasing order of aggressiveness.

  1. Emphasize that 6.5% only a threshold. They could emphasize even more that the 6.5% figure is only a necessary but not sufficient condition for a hike. This is the simplest option because it does not require agreement on a new measure, but it would make forward guidance a less and less powerful instrument of monetary policy and thereby violate the principles laid out in Michael Woodford’s 2012 Jackson Hole Paper on monetary policy accommodation at the zero bound, which seem to enjoy widespread acceptance among many FOMC members.
  2. Change the number. They could lower the 6.5% threshold while keeping the focus on the unemployment rate. This would be a pragmatic way of adjusting the current approach for the participation issue without having to introduce new and less widely followed labor market indicators into the FOMC statement.
  3. Change the measure. They could directly couch their guidance in terms of the employment/population ratio (presumably adjusted for the effects of population aging), our total employment gap shown in Exhibit 8, or a participation-gap adjusted unemployment rate. This directly addresses the underlying issue, namely that the unemployment rate has become a less useful statistic. But it would be considerably more complicated in terms of communication.


Financial markets continue to expect a very late exit despite the declining unemployment rate, so Fed officials may not feel much urgency in revamping their forward guidance. But as we approach 6.5%, a reduction in the threshold or maybe even a new measure may well be necessary.

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Manthong's picture

at least it is good to know that we can rely on the weighted BLS choom factor.

Stoploss's picture

Goes right along with the BEA's new 'Liar's King' GDP calculator.

TwoShortPlanks's picture

"Goldman Caves: "The Unemployment Rate Is An Inappropriate Measure Of The Labour Market""

I would have used Food Stamps, Retail Consumption and Consumer Credit, because even a 100% employment rate doesn’t necessarily mean anyone has any Discretionary Spending; the whole of America could be on Subsistent Living....but what the fuck do i know; I'm just a fucktard on the periphery.

At the end of the day, all we’re really seeing is the bumpy plateau of a debt saturated Western Economy…Peak Credit…and we climbed a pretty big mountain of debt.

knukles's picture

Cutting edge research!
I'm so impressed that, I ah...  ummmm .... hummm ...




Oh and PS.  Our 16 oz cups allow for far too much carbohydrates, fats, saturated fats, polyunsaturated fats, polybisaturated fats, ploysexualbisaturated fats, fatfats, lipids, polyunsaturated lipids, fat lip(id)s, CO2, polybicarbonatednegativeion CO2, CO22, rotten fish smell, no postal deliveries in select neighborhoods due to lawlessness (which nobody gives a fuck about and ignores), more assorted elephants under the rug in the middle of the room, gun violence and of course, the chemicals they use try to make everybody vote Republican.
Of course.

Abi Normal's picture

-2 actually, too many big pharma words (we get it) and your republican slur!

What do you not get about being a conservative?  Or is it that republican does not mean conservative any more?  If the latter I will restore +1

I would much rather hang my hats with conservatives, who back the constitution and bor than the liberals who destroy them!


Pardon my brown trousers will you!

hungrydweller's picture

You're getting close!  True conservatives are actually true liberals but they just don't know it.  Think liberty and Jeffersonian liberalism.

asteroids's picture

Even if the government changed "what" they measure, they completely miss "how" they measure. The numbers produced can NOT be trusted. Only releasing the raw data will work.

max2205's picture

They want Ben to target corporate bonuses.  They are too low!

obejoyful's picture

If you are trying to be funny you are about a year to late.  This has been done a million times.


If you think it is bullish you are an idiot.  Either way this seems stupid.

Telemakhos's picture

I'm not so sure I'd call him an idiot for thinking this is bullish.  

  1. Goldman is calling attention to the difference between the Fed's employment mandate and unemployment statistics in a way that can only encourage the Fed to take more action (QE's target is, after all, 'employment,' even though we all know that injecting liquidity into the shadow banking system does little to increase employment).  Assume that Goldman is, has been, and will continue to frontrun the Fed, a la the Bears and the Bernank.  Ergo, Goldman is encouraging the Fed to engage in behavior that will earn Goldman money.
  2. The more liquidity gets injected into the system, the higher stock prices go.  This is why the stock market's rise parallels the Fed's balance sheet expansion.
  3. Goldman's bond traders have an incentive (see 1) to see stock prices in the aggregate go higher (see 2).

Bullish.  At least until the system collapses.

Abi Normal's picture

I will definately agree with your logic, after all if one makes the employment look worse, then MOAR QE and this only helps the blanksters! F 'em and the horses they rode in on!

verum quod lies's picture

The bottom line is that we now have an "unemployment rate" that can be zero yet have 100% unemployment (i.e., no one working). Thus, generating "maximum employment" is not possible by using the current measure of 'unemployment' as an inverse target; for example, it ignores/does not count unemployed people no longer working or underemployed people who work but a few hours a week. The simple fact is that the politically inspired changes the BLS and others have made to things like the 'unemployment rate/U-3', 'GDP, 'inflation', etc. (beginning sometime around the early 1980s) render the numbers used to measure such things almost contrary indicators of the very things they still and currently purport to measure (i.e., with a straight face). The giant Vampire Squid must even now be embarrassed by it all to call a spade a spade (well at least a partial spade); good for them and screw them and the false propaganda numbers they spin yarns for the muppets about.

Glasnost's picture

This is actually along the lines of what I was about to reply.

kliguy38's picture

what labor market?

LetThemEatRand's picture

These guys get paid for this?

Cognitive Dissonance's picture

Say it ain't so Goldman Sachs, say it ain't so.

Kayman's picture

So Goldman Sucks have enough Derivative Engineers on staff that ought to know a Saddle Point in a differential equation.  A Saddle point- where both minimum and maximum exist simultaneously.

That should make it easy to talk out of both sides of your mouth.


nmewn's picture

Here ya go CD...

"China Is Censoring Jokes About Its Propaganda Machine's Penis-Shaped HQ"

Hard pivot ;-)

Cognitive Dissonance's picture of them. ;)

TheFourthStooge-ing's picture


New headsquarter building Chinese Communautist Ministry of Truth gauchery gives telling frustrateds Chinese citizenism citizens with tiny pee pee much the long lei.

Mastodonic turgidity structure overcompensatory intent try to hide the dungpow furuncle.

Wonders not moreso regarding source of overconsumption rhinoceros horn and shark fin soup ostentiously.

JenkinsLane's picture

No shit Sherlock - Goldman publicly states what it and everyone else who pays attention to these figures has known for years.

Thank you John Williams.


Wakanda's picture
Goldman Caves: "The Unemployment Rate Is An Inappropriate Measure Of The Labor Market"

Translation:  Somebody's limo got pelted with rocks.

Seasmoke's picture

I prefer to be unemployed. Thank you very much.

q99x2's picture

Pointless argument since they only have to hold out until they wage war against us with the DHS. 

Peter Pan's picture

Sometimes I get to the point of thinking that it's time to decrease everyone's working hours by 20% and their debt or rent by 20% and redistributing those hours to all the unemployed so that we are ALL pulling our weight. No more social security unless you are well and truly invalid or aged.


JackT's picture

Yep - drop all full-timers to 1/2 and force a doubling of the workforce and you get a doubling.  Althought I think the tax base would be less. 

dognamedabu's picture

Or they could remove red tape, Obamacare, taxes, and anything else that scares the shit outta a small business entrepreneur from taking risk. The jobless rates would plummet.

random shots's picture

Here comes the push to use U-6 unemployment as the Fed's Target to keep QE going forever. 

NoDebt's picture

Love the idea, but it'll never happen.  That would be tantamount to admitting U6 is the real unemployment rate, not U3, as has been the benchmark forever.  No way they're going to admit that.

They will, however, use the broad concept you offered- change the targets.  They're in full/desperate make-shit-up-as-you-go-along mode.  Anything and everything will be changed as needed without prior written notice.  That much is for sure.

TrustWho's picture

Surprise, surprise, Goldman wants MOAR QE!

Aquarius's picture

Goldman in its revelation, is like a dog eating old public domain vomit.

Ho hum

monad's picture

Yes, lets get rid of this short selective list of people who aren't paying tribute, because thats what this comes down to. Even if you aren't working you have to pay Lloyd and basically, you aren't paying enough. After all, politicians are expensive pets. Have you seen what Obama costs? So lets get some wealth extraction programs going on the welfare recipients and the disabled. What do you think this is, representative democratic government?

monad's picture

and lets get those convicts a Chinese wage. They aren't paying any taxes. Doesn't that seem unfair to you?

fxrxexexdxoxmx's picture

+100 That just about sums it up.

W T F II's picture

By the time the Belmont Stakes rolls around, I am sure a Unicorn will be the odds-on favorite..!!

Aurora Ex Machina's picture

Will the glowing light of God's will stay on when Manhattan is burning? The last bastion of Capitalism as the OccupyZombie hordes ravage the local Starbucks? Still sneering at them as you face a few million people after five days without supplies? Will you sup on your $1000 bottle of Champagne as the clouds roll in? Will you curse as that $150 million spent on total information awareness security around the metropolis crumbles under the weight of its badly trained, non-union staff? What will Bloomberg think about his $22 billion as civilization ends?


You have to consider the possibility that that God does not like you.

Downtoolong's picture

Goldman, would expect the Fed to 'change' its target for their outcome-based guidance (to enable moar printing).

Yep. Don't forget who's in charge here Ben. Don't even think of thinking about curbing QE until we say so.


WelfareFTW's picture

so.... buy stocks?

Sutton's picture

Without QE Obama would not have been re-elected which would (might) have saved the economy. Instead fuckhead Ben giave the street hustler 4 more years to destroy the economy.

W T F II's picture

GOLD, man....!!

Tombstone's picture

The scary part is that these brain dead knuckleheads (government types) are running the country into the ground.  It is as if welfare is now the new way to earn a living.  GS?  Who can trust them?  They are way too self serving.  The fact that many more will try to retire and collect SS and Medicare against an already rising debt load, is very disconcerting.  You have to wonder if the FED has any clue.  And, the lemming parade continues on Wall Street without a care in the world.  Then again, computers rarely exhibit feelings.

suicidalpsychologist's picture

I am sick and tired of all these lies. Unemployment is probably twice higher than the so called "official" numbers wether it's in north america or europe, and we all know it, well the smartest ones of us, we just have to look at people, at reality, no need for the official PC bullshits.

It is not going to end well for some very simple, basic reasons; There are too many people, and not enough jobs, FUCK is that so hard to understand? So what is going to happen as a result? The very same fucking thing that has always happened in nature and in the human specie when a balance needs to be found for the survival of said specie; Natural selection.

Stop fucking sugar coating the reality. We have millions of depressed atheists who were told by their batshit crazy single moms who ran fathers out of the homes that they should end in a fucking office pushing paper because anything else is "not good enough for my son/daughter", we have women who dont want to become equal of men, but to DOMINATE them and reverse nature, who dont reproduce anymore, millions of sons becoming either homosexual or depressed and tired of life in their 20s because they simply cant stand the fucking bizarro world they re living in, a world led by feminist, socialo communist women and neutered, fucked up "men" who dont even know if they still have balls between their legs or not.

We have at the same time millions of immigrants from the third world imported in north america and europe by cynical elites, big bosses, industrials, politics, while journalists promote bullshit pc multiculturalism that doesnt even exists, materializes in reality, with the sole and only purpose to merge the middle and lower white social class with the middle and lower social classes from the third world in order to fucking lower salaries and increase competition between humans. As long as the economy works and everyone can enjoy his daily routine made of tv comsuption , welfare checks video games porn everything is fine, people stay in their communities and pretend to be part of a nation, fact is they dont mix in our daily lives; people stick together based on their skin color, religion, system of belief first and foremost. They all fucking pretend to be friends at work , but in fact it's just that, pretending. Now, remove the fucking comfy lifestyle we have, let the economies collapse and nature will go back to its roots just as it always does; people will stick with their owns based on their skin color, religion, first and foremost. People will jump at each others throats the good old fashioned way. People will defend their own interests, families, at the expense of other people and their own interests in a giant free for all that is

 We are fucking, animals. And only the smartest, adapt, and survive.

In the end an equilibrium will be found as it always does, but first, people will starve, then will be led to wars by manipulators at the top of the human comedy/pyramid, will fight some others lost assholes from another country who happen to need, want, the same ressources , people will die, strongest, smartest will survive... and life will go on.



W T F II's picture

but, how do you REALLY feel..?

otto skorzeny's picture

you and ann barnhardt shoul go on a date.

Westcoastliberal's picture

Unemployment is really about 23% in the U.S.

Vendetta's picture

yeah, I remember bundy saying the say thing about women, he was implementing his solution when 'the man' stopped him.

Judge Crater's picture

Goldman Sachs is stating an obvious fact: the official U.S. unemployment rate is a fraud, a liar's statistic.  Long term unemployed Americans become "unpeople," invisible for purposes of computing the unemployment rate and for deciding to extend Unemployment Insurance (UI) payments for extra weeks over the 26 week base payout period.  Instead of providing additional UI checks to those at the bottom of the heap, the "have nots," the long term unemployed, Obama gears up for more military spending that goes to the "haves."  While the presstitutes on TV make much of the Dow Jones average breaking 15,000, the DJ average includes only the bluest of the blue chip stocks.  If a company like Eastman Kodak hits the skids, it gets booted off the DJ industrial average.  The TV news shows and the remaining newspapers in the USA are populated by sniveling toadies who are scared of losing their jobs, so none of these reporters have the nerve to say to Obama the organ grinder that "liar, liar, your pants are on fire!"


The first problem, the seeming inaccuracy of the unemployment figures, can be traced to the Reagan administration. It was decided that unemployment figures were scary for the new administration so, in 1982, they created new constraints on who could be counted as unemployed. They dropped people who had not looked for a job in the last two weeks. They also dropped teenagers who had been employed but were now unemployed. By some estimates, the real unemployment rate is closer to 10% than it is to 5%.

fxrxexexdxoxmx's picture

So you are saying Bill Clinton had eight years in which to fix the last guys bullshit numbers and correct the flawed data?

Why  do you think he failed to make the change?

I find it refreshing when people call Bill Clinton a POS thanks for reminding me.