FED PAPER: The Labor Market Won't Return To Normal Until Summer 2015

The Federal Reserve has said it won't begin to taper its stimulative bond buying program and raise interest rates until the outlook for the labor market has significantly improved.

But how will we know when we get to that point?

A new paper from the Kansas City Fed, "Assessing Labor Market Conditions: The level of activity and the speed of improvement," tries to answer that, and it argues the U.S. labor market won't return to normal for at least another two years(via Reuters' Paige Gance).

Authors Craig Hakkio and Jonathan Willis took 23 labor market variables and distilled them into two indicators.

The first, "level of activity," includes the traditional unemployment rate, and measures related to marginally attached workers and the long-term unemployed. while "rate of change" takes into account growth rates of private employment, total hours worked, and average hourly earnings, among others.

Since September 2012, [level of activity] has been increasing at a faster average monthly rate of 0.042. Despite these steady gains, the level is still about one standard deviation below its historical average. Over the prior two decades, the level was higher than it is now 79 percent of the time.

In contrast to the level of activity, the measure capturing the rate of change in labor market conditions has been well above average for some time. This measure has had an average value of 0.77 since September 2012. Prior to September 2012, the speed of improvement in the labor market exceeded this level only 14 percent of the time.

They conclude that given where current activity levels are now, and how fast they're improving, the labor market won't return to its mean level of activity until summer 2015.

This lends credence to Ben Bernanke's belief that the regular unemployment rate understates the weakness of the labor market.