What Is the Labor Market Conditions Index?

In March of 2014, the Federal Reserve introduced a tracking indicator to assess changes in the labor market, called the Labor Market Conditions Index (LMCI). In August 2017, the Federal Reserve discontinued updating the index. 

The LMCI tracked changes in the labor market by finding variations from multiple labor indicators, ranging from unemployment rates to wages to layoffs to business surveys. The index once played a critical role in helping the Fed with its mandate of ensuring maximum employment, but it also drew criticism from some economists. 

This is a look at the history of the discontinued LMCI, the criticism it drew, and its ultimate end. 

The thinking behind the LMCI was to consolidate a number of traditional measures of unemployment to create a cohesive picture of the labor market. While announcing the indicator at the Fed's meeting in Jackson Hole, Wyoming, Fed Chair Janet Yellen said the indicator was a “broader gauge” of labor market as compared to unemployment numbers. For example, the LMCI included statistics related to underemployment, part-time work and long-term unemployment. 

To that extent, the LMCI reflected the complicated nature of the labor market, which was affected by factors ranging from worker displacement due to technology to recession economics. In turn, this complexity had made it difficult for economists to assess the nature and causes of unemployment.  

The LMCI had a negative correlation with unemployment rates: it increased with a decrease in unemployment, and vice versa. Thus, it veered into negative territory at the height of the Great Recession and began consistently increasing in the ensuing recovery. The Fed had made available a backdated data series from 1976 with the new indicator. 

A number of economists questioned the LMCI's relevance and utility in policy. For example, the LMCI's negative correlation with unemployment led some economists to doubt its efficacy as a measurement index. 

In a 2014 blog post, Carola Binder, an assistant professor of economics at Haverford College, wrote that the index was a nice “statistical exercise” but that she was “disappointed” about the LMCI's “almost perfect” negative correlation with the unemployment rate. “The LMCI doesn't tell you anything that the unemployment rate wouldn't already tell you,” she wrote. "Given the choice, I'd rather just use the unemployment rate since it is simpler, intuitive and already widely used.” 

According to Binder, there was no need for a single statistic to encapsulate conditions in the labor market, because it reduces the complexity of various actual figures, such as the numbers of underemployed or long-term unemployed, in the market. And Tim Duy, a professor at the University of Oregon, wrote that the LMCI should be used with “extreme caution” as the Fed had not explained its “policy relevance.” 

The problem, at the time, lies in the fact that the Fed hadn't made publicly available the raw data or calculations used for the LMCI. In addition, the creators of the index had already cautioned that “a single model is no substitute for judicious consideration of the various indicators.”

In a notice on its website on Aug. 3, 2017, the Board of Governors of the Federal Reserve System announced that the index would no longer be updated because it stopped accurately reflecting changes in U.S. labor market conditions:

"As of August 3, 2017, updates of the labor market conditions index (LMCI) have been discontinued; the July 7, 2017 vintage is the final estimate from this model. We decided to stop updating the LMCI because we believe it no longer provides a good summary of changes in U.S. labor market conditions. Specifically, model estimates turned out to be more sensitive to the detrending procedure than we had expected, the measurement of some indicators in recent years has changed in ways that significantly degraded their signal content, and including average hourly earnings as an indicator did not provide a meaningful link between labor market conditions and wage growth."

Economists were not surprised by the end of the index, which never really gained popularity.