I would like to highlight some work by Richmond Fed economists Andreas Hornstein and Marianna Kudlyak and Professor Fabian Lange of McGill University. In a recent paper they authored with Tim Sablik of the Richmond Fed, they have developed a new and intuitively appealing approach to estimating the extent of labor underutilization

They construct what they call a Non-Employment Index by taking each category of persons who are not working and weighting them by their propensities to become employed. This provides a unified framework for viewing the non-employed population that addresses many of the objections that have been raised to the conventional unemployment rate. They also take an improved approach to incorporating part-time workers by taking into account that the underutilization of a person working 20 hours per week is less than the underutilization of a person working zero hours.

Movements in their Non-Employment Index over time closely track movements in the conventional unemployment rate In particular, the Non-Employment Index is about where it should be based on past episodes when the standard unemployment rate was about 5.9 percent.

This research supports the conclusion that the standard unemployment rate by itself is still a reliable indicator of the degree of labor underutilization. There is more underutilization than captured by the unemployment rate, but there always is, and there seems to be no more now than is typical when the unemployment rate is where it is now.

Figure 6 shows how states look when plotted in terms of the U-3 rate (the horizontal position) and workers part-time for economic reasons (the vertical position), both compared to a pre-recession average (calculated from 2005 to 2007). A large number of states are clustered in the upper right hand quadrant of the figure, indicating that both U-3 unemployment and those who are part-time for economic reasons remain well above levels from before the recession. There is also a clear trend in the data, where states with U-3 unemployment well above that pre-recession average tend to have higher part-time workers relative to pre-recession levels. I would also point out that many of the states that have very high U-3 unemployment and workers part-time for economic reasons are states that were disproportionately impacted by the financial crisis (states such as Arizona, Nevada, and Florida).

...[M]onetary policy ultimately must be conducted in a pragmatic manner that relies not on any particular indicator or model, but instead reflects an ongoing assessment of a wide range of information in the context of our ever-evolving understanding of the economy.

My own assessment {in December 2013} was that the economy would gradually recover. I projected that by the fourth quarter of 2014 the unemployment rate would decline to 6.2 percent, and year-over-year PCE inflation would rise to 1.8 percent. Consistent with that view of gradual economic recovery, I believed that an appropriate monetary policy would require the funds rate to rise to 1.25 percent by year-end 2014.

With the economy having already reached my year-end 2014 forecast for inflation and unemployment, and appearing to be well on its way toward achieving my 2015 forecasts approximately a year ahead of schedule, the funds rate setting remains well behind what I consider to be appropriate given our goals.

We are making progress on the full employment goalby some measures, like the rate of civilian unemployment, a lot of progress. The rate of unemployment fell to 6.3 percent last month and is closing in on levels that many believe to be consistent with a practical definition of full employment. But a number of other measures of labor market performance tell me that the economy is still operating well short of full employment. Notably, there remains an unusually high percentage of prime working-age people who are marginally attached to the labor force, who are working part-time jobs when they would prefer to be working full-time, and who are leaving the workforce. These indicators and others suggest to me that fulfillment of our employment mandate is still a ways off.

The weakening demand during recessions forces firms to look for new ways to be more efficient to cope with hard times. These adjustments do not affect all workers equally. Indeed, its what we typically think of as middle-skilled workersfor example, construction workers, machine operators and administrative support personnelthat are hardest hit during recessions. Further, a feature of the Great Recession and indeed the prior two recessions, is that the middle-skill jobs that were lost dont all come back during the recoveries that follow. Instead, job opportunities have tended to shift toward higher- and lower-skilled workers.

With respect to the issue of short-term unemployment, I -- and its more relevant for inflation and a better measure of the labor market, I've seen research along those lines, I think it would be tremendously premature to adopt any notion that says that, that is an accurate read on either how inflation is determined or what constitutes slack in the labor market.

So I think this is something our committee will be looking at, especially as unemployment goes down and other labor market indicators hopefully simultaneously improve.

We'll be looking at a broad range of indicators. We're looking to see progress on many different mentions where we see slack in the economy, but I won't endorse -- I certainly don't think our committee would endorse the judgment of the research that you cited.

In response to a question about her personal labor market dashboard

So I have talked in the past about indicators I would like to watch or I think that are relevant in assessing the labor market, in addition to the standard unemployment rate. Certainly look at broader measures of unemployment. I mentioned U6 in my statement.

However, it is coming down as well as U3 (ph), it's moving in the right direction, and has moved even more recently than U3 (ph). Of course, I watched discouraged and marginally detached workers. The share of long term unemployment has been immensely high and can be very stubborn in bringing down. That is something I watch closely. Again, that remains exceptionally high. But, it has come down from something like 45 percent -- high 30's -- but that's certainly in my dashboard.

Labor force participation, I-- I do think most research suggests due to demographic factors, labor force participation will be coming down and there has been a downward trend now for a number of years. But, I think there is a cyclical component in the fact labor force participation is depressed. And so it may be that as the economy begins to strengthen, we could see labor force participation flatten out for a time as discouraged workers start moving back into the labor market, and so that's something I'm watching closely, and the committee will have to watch.

There are different views on this within the committee. And it's hard to note definitively what part of labor force participation is structural versus cyclical, so it's something to watch closely.

I've also mentioned in the past measures of labor market turnover. You mentioned quits. Remarkably, a large share of workers quit their jobs every month, usually going directly into another job, and I take the quit rate in many ways as a sign of the health of the economy. When workers are scared they won't be able to get other jobs, they show a reduced willingness to quit their jobs.
The final thing I'd mention is wages. And wage growth has really been very low. I know there is perhaps one isolated measure of wage growth that suggests some uptick, but most measures of wage increase are running at very low levels. In fact, with productivity growth, we have, and two percent inflation, one would probably expect to see on an ongoing basis something between perhaps three and four percent wage inflation would be normal. Wage inflation has been running at two percent, so not only is it depressed, signalling weakness in the labor market, but it is certainly not flashing. An increase in it might signal some tightening or meaningful pressures on inflation, at least over time, and I would say we're not seeing that.

Consistent with the modest pace of economic growth, improvement in labor market conditions has been slow. Even though the unemployment rate has declined by 2.7 percentage points from its peak of 10 percent in October of 2009, there are still many people that want jobs but are not counted as unemployed because they are not actively looking for work. An alternative measure of labor market conditions, the employment to population ratio, which is not influenced by changes in the number of these workers, has shown limited improvement. Job loss rates have fallen, but hiring rates remain depressed at low levels. Taken together, the labor market still cannot be regarded as healthy. Numerous indicators, including the behavior of labor compensation, are all consistent with the view that there remains a great deal of slack in labor markets.

Since the early 2000s, however, the job reallocation rate has slowed...

Interpreting this apparent loss of dynamism across firms is not straightforward. It could be that these slowing dynamics are not a bad thing if we get the same growth of productivity we've enjoyed in the past without so much churning of jobs. But that doesn't quite fit with the low productivity growth we've experienced during this recovery.

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The likely direction of productivity measures in our economy is the subject of considerable debate. Another, more concerning possibility is that the slow advance of productivity reflects a fundamentally less dynamic economy.

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The question I posed at the outset was whether the economic dynamism of the United States is declining. Is America losing its economic mojo? There is some evidence to the affirmative. I believe some of what we observe can be explained by the recent recession and frustratingly slow recovery. There are reasons to believe that some of the decline is cyclical in nature and will reverse itself over time.

BACHUS: Chairman Bernanke, you mentioned last year in Jackson Hole that you viewed unemployment as cyclical. Do you still believe it's cyclical and not structural?

BERNANKE: Well, just like my answer a moment ago, I think that probably about 2 percentage points or so -- say the difference between 7.6 and 5.6 -- is cyclical and the rest of it is what economists would call frictional or structural.

BACHUS: So you -- OK -- so it's -- have you done -- so your study (ph) you think maybe 5 percent structural and 2 percent cyclical?

BERNANKE: Well, most importantly, I -- so far we don't see much evidence that the structural component of unemployment has increased very much during this period. It's something we've been worried about, because with people unemployed for a year or two years or three years, they lose their skills, they lose their attachment to the labor market, and the concern is they'll become unemployable.

So far it still appears to us that we can attain an unemployment rate -- we, the country can attain an unemployment rate somewhere in the 5s.

BACHUS: The most recent FOMC minutes didn't specifically address the 7 percent unemployment target, but you -- you mentioned it in your press conference after (ph). Was that 7 percent target discussed and agreed on in the meeting?

BERNANKE: Yes, it was. Seven percent is not a target. It was intended to be indicative of the amount of improvement we want to see in the labor market. So I described a series of conditions that would need to be met for us to proceed with our moderation of purchases.

We have -- we have a go-around where everybody in the committee, including those who are not voting, get to express their general views. And there was -- there was good support for both the broad plan, which I described, and for the use of 7 percent as indicative of the kind of improvement we're trying to get.

Currently, we have an unemployment rate of 7.6 percent, which I think, if anything, overstates the health of our labor markets given participation rates and many other indicators of underemployment and long-term unemployment. So we’re not there, obviously, on the maximum employment part of the mandate.

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There will not be an automatic increase in interest rates when unemployment hits 6.5 percent. Instead, that will be a time to think about the situation anew. And given, as I said, the weakness of the labor market, the fact that the unemployment rate probably understates the weakness of the labor market, given where inflation is, I would suspect that it may be well sometime after we hit 6.5 percent before rates reach any significant level.

There appears to be widespread confidence that the Federal Reserve will keep inflation low and stable, consistent with our announced inflation goal of 2 percent. Indeed, most forecasters view the current readings on inflation to be a temporary phenomenon and expect inflation to run at or a little below 2 percent over the next few years. Household surveys and financial market measures also indicate that inflation is expected to remain near its longer-term average. My own view is that the transitory factors depressing inflation are likely to ebb, and we’ll see inflation edge back toward the Federal Open Market Committee’s target of 2 percent by next year.

... Looking ahead, the key question regarding the economic outlook is whether growth will remain relatively low. Many forecasters expect growth to pick up to over 3 percent next year. I have become increasingly persuaded, however, that low growth rates are likely to persist for several years.

...the slow growth in real GDP in this expansion is related to both lower productivity growth and lower employment growth. While economists understand the principles underlying productivity growth, it’s quite difficult to parse the causes of medium-term swings in productivity growth, particularly as they are happening. At this juncture, low productivity growth has persisted long enough that I think the best guess is that it will remain low for an extended period.

[O]ur target is not 7, it’s not 6½, our target is maximum employment, which, according to our projections, most people on the Committee think is somewhere between 5 and 6 percent unemployment, and that’s where we’re trying to get to. The 7, the 6½—these are guideposts that tell you how we’re going to be shifting the mix of our tools as we try to land this ship on a, you know, on a—in a smooth way onto the aircraft carrier.

Many employers are looking to make the employment relationship more flexible, and so are increasingly relying on part-time work and a variety of arrangements popularly known as "contingent work." This trend toward a more flexible workforce will likely continue. For example, while temporary work accounted for 10 percent of job losses during the recession, these jobs have accounted for more than 25 percent of net employment gains since the reces­sion ended. In fact, tempo­rary help is rapidly approaching a new record, and businesses' use of staffing services continues to increase.

Contingent employment is arguably a sensible response to today's competitive marketplace. Contingent arrangements allow firms to maximize workforce flexibility in the face of seasonal and cyclical forces. The flexibility may be beneficial for workers who want or need time to address their family needs. However, workers in these jobs often receive less pay and fewer benefits than traditional full-time or "permanent" workers, are much less likely to benefit from the protections of labor and employment laws, and often have no real pathway to upward mobility in the workplace.