Jonathan H. Todd: Studies suggest that a low short-term unemployment rate is more indicative of a healthy economy than the overall unemployment rate. Today, the short-term unemployment rate is well below its historical average – so will the economy pick up steam as a result?
In February and March of this year, several economists – and in turn, finance Twitter/blogosphere – had a spirited debate on the meaning of short-term unemployment. A study by Princeton’s Alan Krueger, Judd Cramer, and David Cho, titled Are the Long-Term Unemployed on the Margins of the Labor Market, argued that short-term unemployment is a better indicator of inflation and real wage growth than the headline unemployment rate. They wrote,
The long-term unemployed, whose share of overall unemployment rose to an unprecedented level after the Great Recession, are on the margins of the labor force and therefore exert very little pressure on the job market and economy.
Because the short-term unemployment rate has returned to its pre-recession average, one important implication—if the hypothesis that the long-term unemployed are largely on the margins of the labor market is correct—is that further declines in short-term unemployment would be expected to be associated with rising inflation and stronger real wage growth.
So has this trend continued to play out as expected over the past few months?
To define terms, short-term unemployed are those who have been unemployed for less than 27 weeks. The long-term unemployed are those who have been unemployed for greater than 27 weeks.
The job market for the short-term unemployed is shockingly robust.
The short-term unemployment rate has been relatively flat over the past six months, and stands at 4.2% as of June 2014. This is well below the long-term average of 4.9%, which would be indicative of mounting wage growth and inflation pressure – if the hypothesis of Krueger, et al., is indeed correct.