The Hornstein-Kudlyak-Lange Non-Employment Index (NEI) is an alternative to the standard unemployment rate that includes all non-employed individuals and accounts for persistent differences in their labor market attachment. It provides a more comprehensive reading of labor market health and is based on research first published by Richmond Fed economist Andreas Hornstein, San Francisco Fed economist Marianna Kudlyak, and McGill University economist Fabian Lange. It is updated monthly after the Basic Monthly CPS microdata release, which takes place about two weeks after the monthly BLS Employment Summary release that includes the unemployment rate.
The Hornstein-Kudlyak-Lange Non-Employment Index (NEI) was 8.1 percent in March 2017, edging down from 8.2 percent in February. It has declined by 0.3 percentage points since March 2016. The NEI including workers who are part time for economic reasons (PTER) was 9.2 percent in March 2017, edging down from 9.3 percent from the previous month. That index has declined by 0.4 percentage points since March 2016.
The Non-Employment Index is a weighted average of all non-employed people expressed as the share of the civilian non-institutionalized population 16 years and older. The weights take into account persistent differences in each group's likelihood of transitioning back into employment.
The NEI differs from the standard unemployment rate as a measure of resource utilization in two important ways:
1. It counts not only the unemployed, but also those out of the labor force. The latter is a diverse group that includes individuals who want a job (such as the marginally attached who are willing and able to work and sought employment in the past, but have stopped searching) and those who do not want a job (such as retirees, the disabled, students, and those who are neither retired, nor disabled, nor in school).
2. It weights the different groups of non-employed (that is, both the unemployed and people out of the labor force) according to their labor market attachment, or the likelihood that a non-employed person will transition back into the job market. Specifically, each group is weighted by its historical transition rate to employment relative to the highest transition rate among all groups (the transition rate of the short-term unemployed).
An additional version of the NEI is calculated to include people who are working part time but would like to work full time, a category called "part time for economic reasons" (NEI+PTER).
Because the NEI is more comprehensive and includes tailored weights of non-employed individuals, it arguably provides a more accurate reading of labor market conditions than the standard unemployment rate.
Another way to interpret the NEI is to look at its movements over time relative to those of the standard unemployment rate. The charts below depict the standard unemployment rate (also called U-3) on the vertical axis against the NEI (in Figure A) and NEI+PTER (in Figure B) on the horizontal axis. Each dot on the scatterplot represents a monthly combination of these series for the period of 1994 to 2017. The latest month is represented by a black triangle. The black line is the linear regression of the unemployment rate on the NEI estimated on the data from January 1994 to June 2007.
During the period prior to June 2007, there was a close linear relationship between the standard unemployment rate and the NEI. Compared to this pre-2007 relationship, the standard unemployment rate understates (overstates) labor market health relative to the NEI in the post-2007 period if the associated dot is above (below) the regression line. By this measure, the standard unemployment rate understated labor market health from roughly 2008 to 2013, but U-3 and NEI have been back to their pre-2007 relationship since about 2014.
The decline of the unemployment rate after the 2007-09 recession has coincided with an increase in the number of individuals out of the labor force. These observations lead to the question: Post-2007, is there substantial labor market weakness beyond what is measured by the unemployment rate? For example, discouraged individuals who are not counted in the labor force aren’t included in the standard unemployment measure, but they do factor into labor market resource utilization. Economic research has shown that discouraged workers are not as distinct from those counted as unemployed as they might appear. They return to work at rates similar to those who have been unemployed for longer than 26 weeks. Therefore, excluding discouraged workers or similar groups from the standard unemployment measure may misstate the degree to which resources in the labor market are utilized.
Obtaining a reliable measure of labor market health is of particular interest to policymakers. To the extent that labor resources are fully utilized, fiscal and monetary policy may be less effective in boosting the economy to improve demand for labor.
For more on how labor market conditions matter for monetary policy, see the Richmond Fed's perspective on labor market conditions.
Hornstein-Kudlyak-Lange Non-Employment Index, Federal Reserve Bank of Richmond, last modified April 17, 2017, https://www.richmondfed.org/research/national_economy/non_employment_index.