Normal Job Market? Not Until 2015 Says Kansas City Fed Bank

At this rate, it will take about two years for the job market to get back to normal, according to research by economists at the Federal Reserve Bank of Kansas City.

Craig S. Kakkio and Jonathan L. Willis took 23 labor market indicators, including the unemployment rate, the rate at which people quit their jobs and hours worked, and divided them into two categories — one tracking the level of activity and the other measuring how quickly things are improving. To attain normalcy, the level of activity would need to reach the average for the past two decades.

On that score, things don’t look good. The level of activity has been higher than it is now 79 percent of the time since January 1992, according to the researchers, which means we have a lot of ground to make up.

The better news is in the rate of change, which since September has been stronger than 86 percent of the two-decade sample. At that pace, the level of activity would reach the average in September 2015, according to Kakkio and Willis. Alternatively, should activity continue to rise at the pace it’s been since September, it will reach the mean in June 2015, they said.

The outlook for the labor market is at the core of the debate surrounding when the central bank will begin reducing bond purchases and, more importantly, when policy makers will start nudging up their benchmark interest rate. The policy making Federal Open Market Committee has said it will continue to buy assets until the job market improves “substantially.”

Either side in the debate — those who want to end purchases now and those who want to wait for further progress — can point to the research to support their views. The hawks can say the labor situation is improving quickly, while the doves can hang their hats on the wide gap between where things are now and the average.

The researchers’ boss would be in the former camp. Fed Bank of Kansas City President Esther George is the only voting member of the FOMC to oppose the stimulus this year, saying it may destabilize financial markets and push up long-term inflation.

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