Why The Unemployment Rate Is Irrelevant

The media, the financial markets and investors have become fixated on the unemployment rate, as reported by the Bureau of Labor Statistics, particularly since it was directly linked by the Federal Reserve to its current bond buying program. With the latest gyrations in the markets over the last couple of months tied to "will the Fed taper or not" the focus on employment has become much more intense since the Fed has tied its bond buying to a 6.5% full employment target.

The problem for the Fed, the markets and the economy, is that the unemployment rate, in particular the U-3 report, has become completely irrelevant.

In order for an economy to achieve a level of growth that becomes self-supporting, which means it doesn't require $85 billion a month in support to stay out of a recession, there are two primary requirements: 1) full-time employment growth that exceeds population growth, and; 2) a level of employment that absorbs the majority of currently available labor force. When these measures are met the available labor pool is reduced allowing for increases in wages and hours worked as competition for available jobs becomes increasingly more intense. In turn, increased employment leads to higher levels of consumption and stronger economic growth.

Currently, despite the Fed's ongoing monetary interventions, the economy continues to "struggle through" at an anemic pace due to the structural change that has taken place within the employment landscape. The issue for the Fed is the ongoing disconnect between the various employment reports and the real underlying issues with employment.

However, the impact of "labor hoarding"  accounts for the majority of these issues.

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