Strategy & Quantitative Research Special Figure: an inclusive Fed - ABN AMRO Investment Solutions
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Strategy & Quantitative Research
Special Figure: an inclusive Fed
09/06/2021
Key Takeaways:
• A new monetary policy framework by the FOMC defining a broad and inclusive maximum
employment goal. Instead of across-the-board measurements – like overall employment and wage
growth – the focus is on groups that typically take longest to regain lost ground.
• We collected labor market indicators Fed officials have mentioned into a dashboard (Figs 1
to 11).
• These broad and inclusive indicators (employment-population ratio and some demographic groups’
unemployment rates) suggest more slack than the usual headline unemployment rate (U3).
• This new strategy has dovish monetary policy implications. The Fed will remain dovish even if
overall U3 hits the Fed’s longer-run goal if inflation is only modestly above 2% and stable. The
Fed is participating to the “high-pressure economy” strategy of the Biden administration.
At the conclusion of its monetary policy framework review last year, the FOMC announced that policy
decisions would be informed only by “shortfalls” of employment from its maximum level rather than by
“deviations” from its goal in either direction, and that maximum employment will be a “broad-based and
inclusive” goal that is assessed with a “wide range of indicators.”
This change in the policy framework largely reflects the lessons learned from the tight labor market
before the Covid-19 crisis. Chair Powell has said that the tight labor market at the end of the last cycle
was narrowing economic disparities and “delivering life-changing gains,” particularly for people from low-
and moderate-income communities.
Fed officials are increasingly emphasizing the new broad and inclusive mandate when discussing the
employment outlook1. Chair Powell’s comments at the March 2021 FOMC press conference explained
that Black and Hispanic unemployment rates were among the “dozen things” that the FOMC looks at in
addition to the overall unemployment rate. Other officials have expressed similar sentiments recently.
Fed officials will consider a broader set of indicators when assessing maximum employment than they
have previously, and that these indicators are increasingly focused on the employment outcomes of
specific demographic groups that are slower to recover in economic expansions.
Research has shown that the labor market experiences of less advantaged groups are more cyclically
sensitive than the labor market experiences of more advantaged groups; in other words, less
advantaged groups experience a “high-beta” version of the aggregate fluctuations in the labor market2.
For example, when the unemployment rate of whites increases by 1 percentage point, the
unemployment rates of African Americans and Hispanics rise by well more than 1 percentage point, on
average.
1 See e.g. among others:
Governor Lael Brainard, February 24, 2021, “How Should We Think about Full Employment in the Federal Reserve's
Dual Mandate?”.
Chair Jerome H. Powell, February 10, 2021, “Getting Back to a Strong Labor Market”.
Vice Chair Richard H. Clarida, November 16, 2020, “The Federal Reserve's New Framework: Context and
Consequences”.
Philadelphia Fed President Patrick T. Harker, October 02, 2020, “The Importance of an Equitable Workforce
Recovery”.
Chair Powell’s Press Conference, September 16, 2020, “Transcript of Chair Powell’s Press Conference”.
2 Stephanie Aaronson, Mary Daly, William Wascher, and David Wilcox (2019), “Okun revisited: Who benefits most
from a strong economy?”, Brookings Papers on Economic Activity, Spring.Date: 09/06/2021 Page
2/9
In 1973, Arthur Okun wrote an iconic paper asking whether a “high pressure economy” could contribute
to the upward mobility of U.S. workers. Okun’s hypothesis was simple. In a high-pressure economy –
defined by resource utilization running beyond its longer-run sustainable rate – firms would find it difficult
to fill vacancies at a given wage and would react by relaxing hiring standards and reducing their use of
statistical metrics for evaluating candidates in favor of more intense personal screening. He argued that
these changes had the potential to improve the economic circumstances of less advantaged workers,
allowing them to find employment, build their skills, and climb the job-and-income ladder.
To monitor the new goal’s impact, we have collected labor market indicators based on commentary from
current and prior Fed officials. That means a prominent place on the Powell dashboard for metrics like
the Black unemployment rate, wage growth for low-income workers, and labor-market participation
among Americans without college educations. The main change relative to the previous signals followed
under Chair Yellen’s leadership is the integration of more demographic-specific employment measures.
These metrics are signaling that there is still a long way to go. If investors absorb this message, it will
help to reinforce the economic support being provided by easy Fed policy. Currently, the unemployment
rate for minority and less educated workers is very high, reflecting the disproportionate layoffs that these
groups experienced during the pandemic, while other measures of labor market tightness like quit rates
and wage growth are near their peaks from the last cycle.Date: 09/06/2021 Page
3/9
Figure 1: US unemployment rates (U3, U5 and U6)
Source: Bureau of Labor Statistics.
Note: U3 is the headline unemployment rate generally reported in the media: People who are able to work, ready to work, and
have looked for work in the past four weeks. This corresponds the most closely to the definition of unemployment we started with.
U4 is U3 plus those who would like to work but have stopped looking—the so-called discouraged workers—because they believe
there are no jobs for them.
U5 is U4 plus those who are marginally attached to the labor market who, for any reason, are no longer searching for work but
may still work.
U6 is U5 plus those who are working part-time but would prefer to work full-time
Figure 2: All Employees, Total Nonfarm
Source: Bureau of Labor Statistics.Date: 09/06/2021 Page
4/9
Figure 3: Employment measures
Source: Bureau of Labor Statistics.
Note: Employment population ratio is the proportion of the country's working age population that is employed. Labor force
participation rate is the proportion of the country's working age population that is considered as active (employed and unemployed
but looking for a job). Both have the same denominator. 100 – labor Force participation rate measures those who do not want to
work. Principally (and not considering retirees and students here since 25-54Y people are considered), these are people with
various handicaps, people who dropped out of the labor force, and people who do not want to work.
Figure 4: Unemployment and non-employment indices
Source: Bureau of Labor Statistics and Richmond Fed.
Note: The Hornstein-Kudlyak-Lange Non-Employment Index (NEI) is a weighted average of all non-employed people expressed
as the share of the civilian non-institutionalized population 16 years and older. The weights consider persistent differences in each
group's likelihood of transitioning back into employment. Because the NEI is more comprehensive and includes tailored weights
of non-employed individuals, it arguably provides a more accurate reading of labor market conditions than the standard
unemployment rate. It counts not only the unemployed, but also those out of the labor force. Specifically, each group is weighted
by its historical transition rate to employment relative to the highest transition rate among all groups (the transition rate of the
short-term unemployed).Date: 09/06/2021 Page
5/9
Figure 5: Prime-Age Employment-Population Ratio (25-54Y)
Source: Bureau of Labor Statistics.
Figure 6: Employment-Population Ratio by race and ethnicity
Source: Bureau of Labor Statistics.Date: 09/06/2021 Page
6/9
Figure 7: Employment-Population Ratio by degree levels
Source: Bureau of Labor Statistics.
Figure 8: Unemployment rate (U3) by race and ethnicity
Source: Bureau of Labor Statistics.Date: 09/06/2021 Page
7/9
Figure 9: JOLTS Quits: Total Non-farm (index of confidence of workers)
Source: Bureau of Labor Statistics. The Job Openings and Labor Turnover Survey (JOLTS) program produces data on job
openings, hires, and separations.
Figure 10: Employment Cost Index: Total compensation for Private industry workers
Source: Bureau of Labor Statistics.Date: 09/06/2021 Page
8/9
Figure 11: Wage growth tracker per wage level
Source: Current Population Survey, Bureau of Labor Statistics, and Federal Reserve Bank of Atlanta Calculations.Date: 09/06/2021 Page
9/9
The information included in this document has been prepared by ABN AMRO Investment
Solutions (“AAIS”) for information purposes only and does not constitute a
recommendation or investment advice.
The information, opinions and figures were considered to be well-founded or exact on the
day they were produced, they take account of the economic, financial or trading conditions
at that time and reflect AAIS’s prevailing view of the markets and its predictions for the
future.
They have no contractual value and are subject to change. Given, therefore, that this
analysis is subjective and for information purposes only, we draw your attention to the fact
that the actual changes in economic variables and financial markets may deviate
significantly from the indications provided in this document.
This document may not be reproduced or distributed and is intended only for its original
addressees and may not be used for anything other than its original purpose.
This document is intended only for its original addressees and may not be used for anything
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without the prior written consent of AAIS and AAIS shall not be held responsible for any
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