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Employment Governance Trade and investment

Market reaction to US Federal Reserve announcement, Canadian economic slowdown, and the link to unemployment

Good news on jobs may be bad for stocks

Caroline Valetkevitch, Reuters June 2, 2013

Two days ago, US Federal Reserve Chairman Ben Bernanke signaled corporate welfare (‘stimulus’, ’quantitative easing’, whatever other nice, official-sounding term for it) would be winding down as a result of economic, specifically employment, recovery.

Mr. Bernanke tried to qualify his statement.

Too late. Markets heard “no more corporate welfare”, reacted accordingly. The predicted market tumble on news that corporate welfare would be cut came true.

Everything, including commodities, fell on the news. Canada’s petro-dollar tanked, dropping two cents. The questionable Canadian economic data released over the last couple of weeks likely didn’t help.

The interesting part in this story (at least to us) is the emphasis on employment. Mr. Bernanke suggested in his qualifying statement being flexible on the unemployment rate, that it was “a threshold – NOT a trigger“. He went on to elaborate the FOMC would be “taking into account whether that unemployment rate fairly represents, in some sense, the state of the labor market.”

Mr. Bernanke was referring to an alternative measure of labor force underutilization (what unemployment is actually supposed to measure) called U-6 that the Bureau of Labor Statistics publishes monthly.

U-6 Total unemployed, plus all persons marginally attached to the labor force, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all persons marginally attached to the labor force

Marginally attached to the labor force Data refer to persons who want a job, have searched for work during the prior 12 months, and were available to take a job during the reference week, but had not looked for work in the past 4 weeks.

Employed part time for economic reasons Refers to those who worked 1 to 34 hours during the reference week for an economic reason such as slack work or unfavorable business conditions, inability to find full-time work, or seasonal declines in demand.

For the most recent BLS release (May 2013), U-6 was 13.4%, down less than a percent from the previous year. The Current Population Survey (CPS), the data source for the BLS employment releases, is quite detailed. It not only provides data on Americans marginally attached to the labor force (LF), but also for all persons who currently want a job. Those marginally attached in May 2013 numbered 2,164,000, equivalent to 1.4% of the LF. However,  those who indicated they wanted a job in May 2013 numbered 7,193,000, equivalent to 4.6% of the LF. Those who worked part time for economic reasons numbered 7,618,000 in May 2013, equal to 4.9% of the LF. Adding the marginally attached and involuntary part-time workers to the number of unemployed in the numerator (and the marginally unattached to the denominator) gives unemployment rate U-6. The BLS site makes historical data easily accessible as well.

                            Alternative measures of labor underutilization (CPS)
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
U-3 (Official) 6 5.5 5.1 4.6 4.6 5.8 9.3 9.6 8.9 8.1
U-6 10.1 9.6 8.9 8.2 8.3 10.5 16.2 16.7 15.9 14.7
diff 4.1 4.1 3.8 3.6 3.7 4.7 6.9 7.1 7 6.6

In Canada, the nearest published equivalent to the BLS U-6 is a supplementary measure of unemployment called R8 that Statistics Canada does not publish with its monthly Labour Force Survey release, but that is updated in CANSIM Tables (282-0085, 282-0086).

R8 combines the unemployed with discouraged searchers, those waiting for recall or replies, long-term  future starts, and a portion of involuntary part-timers.

Discouraged searchers  are defined as those persons who reported wanting to work at a job or business during reference week and were available but who did not look for work because they believed no suitable work was available.

Waiting for recall (see Temporary lay-off) is self-explanatory.

Waiting for replies is also self-explanatory.

Long-term future start (see Future Starts) are defined as those persons who did not have a job during the survey reference week and did not search for work within the previous four weeks, but were available to work and had a job to start at a later time than the next four weeks.

Involuntary part-timers (see Reason for working part-time) are defined as those who reported they could only find part-time work, whose response is ”business conditions” or “could not find work with 30 or more hours”, whether they looked or did not look for work with 30 or more hours during the past four weeks.

Will contrast underemployment rates reported by the BLS and StatsCan in an upcoming post. In the meantime,  a couple of useful links

Current Population Survey questionnaire – Labor Force Items (includes skip pattern)

Appendix B: Labour Force Survey questionnaire (includes skip pattern)

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