FEDS Notes
PrintOctober 1, 2014
Updating the Labor Market Conditions Index
Hess Chung, Christopher Nekarda, David Ratner
Notice: 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.
In our recent FEDS Note, Assessing the Change in Labor Market Conditions (May 22, 2014), we introduced a new tool, the labor market conditions index (LMCI), which we found to be useful for assessing changes in labor market conditions.1 The LMCI is derived from a dynamic factor model that extracts the primary common variation from 19 labor market indicators. (See Table 1 in that Note for a list of the indicators.)
Starting this Monday, October 6th, we will provide updated estimates of the LMCI every month. In general, we will endeavor to have the updated series posted sometime after 10:00 a.m. on the first business day following the Bureau of Labor Statistics' monthly Employment Situation report. (You can find the release schedule here.) Of course, because the LMCI is a staff research product and not an official statistical release, it is subject to delay, revision, or methodological changes without advance notice.2
Although we will not write a new FEDS Note each month, the latest estimate of the LMCI will be posted as a comma-separated values (CSV) file at the permanent URL http://www.federalreserve.gov/econresdata/notes/feds-notes/2014/files/lmci_feds.csv. This coming Monday, the series available at the link will be the model's estimate of the change in labor market conditions through September, given data available through October 3rd. (Until then, the link will point to the LMCI estimate from our May 22 Note.)
Going forward, users of the LMCI should take note that the entire history of the LMCI may revise each month. Three sources contribute to such revisions. The first source is new data that were not available at the time of the employment report. In particular, at the time of the Employment Situation report each month, the quit rate and hiring rate will be missing for the last two months of the sample because the Job Openings and Labor Turnover Survey is published with a longer lag than the model's other indicators. In subsequent months, as these data become available, the LMCI will revise.
The second source of revision comes from revisions to existing data. Many labor market indicators are subject to revision as additional source data become available or to incorporate annual benchmark revisions or updated seasonal adjustment factors. Prominent examples in the LMCI include the three payroll employment series from the Current Employment Statistics program.
The third source of revision is inherent to the model. The LMCI is derived from the Kalman smoother, meaning that the estimate of the index in any particular month is the model's best assessment given all past and future observations. Thus, when a new month of data is added to the sample, the model will revise its estimate of history in response to the new information. In practice, these revisions tend to be modest and concentrated in the most-recent six months of the sample.
1. As we stated in the original note, additional details about the data, model, and estimation will be provided in a forthcoming FEDS working paper. Return to text
2. On the rare occasion when source data are unavailable or delayed, the updated LMCI will be posted as soon as feasible. Additionally, in situations when the scheduled release falls during the FOMC communications blackout period (PDF), the updated LMCI will be posted after the blackout period has ended. Return to text
Please cite as:
Chung, Hess, Christopher J. Nekarda, and David Ratner (2014). "Updating the Labor Market Conditions Index," FEDS Notes. Washington: Board of Governors of the Federal Reserve System, October 01, 2014. https://doi.org/10.17016/2380-7172.0028
Disclaimer: FEDS Notes are articles in which Board economists offer their own views and present analysis on a range of topics in economics and finance. These articles are shorter and less technically oriented than FEDS Working Papers.
