Afternoon Must-Read: Carola Binder: Thoughts on the Fed’s New Labor Market Conditions Index

Carola Binder: Thoughts on the Fed’s New Labor Market Conditions Index: “The Fed economists employ a widely-used statistical model…

…called a dynamic factor model…. The LMCI is the primary source of common variation among 19 labor market indicators…. The main reason I’m not too excited about the LMCI is that its correlation coefficient with the unemployment rate is -0.96. They are almost perfectly negatively correlated–and when you consider measurement error you can’t even reject that they are perfectly negatively correlated– so the LMCI doesn’t tell you anything that the unemployment rate wouldn’t already tell you. Given the choice, I’d rather just use the unemployment rate since it is simpler, intuitive, and already widely-used…