Why didn’t the US Federal Reserve target employment rather than unemployment?

As we consider the implications of the approaching end of another year I would like to take you back to the approach of Christmas last year. My last pre-Christmas  update in 2011 was on what has become called Christmas Eve Eve and if we take Kylie’s advice and “Step Back in Time” we find something intriguing I think about progress in the US economy in 2012.

The US Economy

So if we jump into Doctor Who’s Tardis and go back to then we see that I was considering the implications of this.

In the week ending December 17, the advance figure for seasonally adjusted initial claims was 364,000, a decrease of 4,000 from the previous week’s revised figure of 368,000. The 4-week moving average was 380,250, a decrease of 8,000 from the previous week’s revised average of 388,250.

This was an improvement on the previous numbers and showed what looked like a decisive break below the 400,000 level for this series. However I expressed some caution about what many were concluding from this.

I notice also that those who told us ( there was a considerable number) that the US economy would grow by 3.5/4% in 2011 seem to be back and are telling us it is growing at that rate right now. Perhaps they have been on a course at the Bank of England.

If we now moves forwards to today I would like to present the latest numbers in the US initial jobless claims series.

In the week ending December 15, the advance figure for  seasonally adjusted initial claims was 361,000, an increase of 17,000 from the previous week’s revised figure of 344,000. The 4-week moving average was 367,750, a decrease of 13,750 from the previous week’s unrevised average of 381,500.

As you can see we find ourselves reviewing a rather similar weekly number. The more important four-week average is lower but it was not a week ago. Not quite what you might expect is it? Now some caution is needed as this series was affected by Hurricane Sandy but even so they are a disappoinment I think and they do not quite coincide with the message that you receive from the falling unemployment rate. It fell from 8.7% on a seasonally adjusted basis in November 2011 to 7.7% a year later,although apparently November’s are not what they used to be as the unadjusted numbers fell by only 0.8%.

If one looks deeper into the improvement in the unemployment rate we see that yet again the participation rate has fallen (from 64% to 63.6%) and that it has helped to flatter the numbers. For those wondering about how this happens the unemployment rate is calculated against an estimate of the labour force rather that against the total population and a measure of the difference between the two is the participation rate.

So in conclusion I am left with the thought that the US economy has improved in 2012 but not by as much as you might conclude from the unemployment rate.

The US Federal Reserve steps into the fray

The unemployment rate in the United States is now being targeted by its central bank as we can see here.

at least as long as the unemployment rate remains above 6-1/2 percent

In so doing the Fed felt -probably correctly- that such a change would so attract the attention of the media that it could nudge its inflation target higher at the same time using the “it’s a good day to bury bad news principle”

inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal

That is above for the inflation target by the way as Stephanie Flanders of the BBC rather bizarrely invented a new strand of economic “thought”  reporting that it was below.

So if we again go back to 2011 we see a reinforcement of my “More,More,More” theme for easing of monetary policy as when Charles Evans of the Chicage Federal Reserve first suggested such a policy he was an outlier. It only took just over a year for it to be become actual policy albeit with different levels as he wanted 7% and 3% respectively. Perhaps the lowering of the unemployment rate represented the Fed’s view of the falling participation rate? But I do not expect them to admit that anytime soon!

Why not target employment instead?

It seems quite clear to me that targeting employment would be a much better strategy than targeting unemployment. Indeed these days it can even be a leading indicator for an economy so would also help with future central bank policy. Also the number in the US has improved over the last year but then we get to the rub it has improved by less than you might expect when you allow for population changes.

So we have a good start with a higher employment level but then troubles emerge if we then compare it to the possible workforce and population levels as we return to issues such as the participation rate again. Tucked in there I suspect is the real reason why the US Federal Reserve did not take this route as we see a turkey it apparently does not want to tackle.

Are all unemployment statistics manipulated?

This has been a perennial issue I am afraid as I watched an episode of Yes Prime Minster recently which mentioned this and when I looked it up it was made some 30 years ago.

Greece should act now

Sadly I see no signs of it taking place but right now would be a good time for Greece to default and devalue as I discussed here.


Fingers crossed….


This area continues to thrive and quite a debate developed in the comments section to my last post. Thank you to all who have contributed to it and I note that there was a suggestion that people should reply with what they think have been the best and the funniest responses in 2012 so here is you chance to do so.

As to the next week I do intend to post at least once with the exact number likely to be decided by events in Japan where I notice that the prospective Prime Minster has told the Bank of Japan that unless it does what it is told it will lose its independence! Time for my financial lexicon again.

Finally for now, let me wish you all a very Merry Christmas.


This entry was posted in General Economics, Quantitative Easing and Extraordinary Monetary Measures, Stagflation, The US Economy and tagged , , , . Bookmark the permalink.
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  • JW

    Hi Shaun

    We talked about ShadowStats recently. You could become a central source of information if you followed William’s path in the UK.

    I think this graph gives a fairly good answer to your question.


    BLS have been messaging these stats for some time, and you know how I feel about X12 and its GIGO ‘seasonality’.

    Again, have a great Christmas

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  • Drf

    “…the prospective Prime Minster has told the Bank of Japan that unless it does what it is told it will lose its independence!” Hi Shaun, that must be one of the truly funniest phrases you have ever posted on your blog!

    To you and all readers have a very good holiday, and a prosperous new year.

  • Anonymous

    Hi Shaun,

    A good analysis to finish the year long series of good posts and I thank you for disseminating your knowledge and insights to the world.

    Maybe we should spend some of the Christmas break reviewing the world of Jim Hacker to try to predict some of the happenings for next year. When the ‘Minister’ series were first transmitted they were very very funny – now though I’m not sure if they aren’t simply scary….

    Have great Christmas and New Year.

  • HarryA


    Excellent point. I’ve also often wondered why we – as consumption driven economies – focus so little on total earnings. A function of both the employment and wage rate and little to do with the unemployment rate.

    However in the same manner that the unemployment rate is being massaged down by a falling labour force, the converse also applies; a sustained improvement in employment conditions will bring disillusioned workers back into the system, thus making the 6.5% harder to hit. Unless the Fed adjusts that target…