Authors Name: 
Justin Katiraei
University: 
Harvard University
Category: 
Economics
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The Suitability of Headline Unemployment (U3) in Federal Reserve Policy

Much of the U.S. Federal Reserve’s monetary policy focuses on U3, the headline unemployment figure. Using the well-established structures of Okun’s Law, the New Classical Phillip’s Curve, and the Beveridge Curve, we empirically test U3 against its five counterparts, U1, U2, U4, U5, and U6, examining how each metric fits these three fundamental theoretical constructs. Employing monthly Federal Reserve data from 1994 to 2013, we find that the broader unemployment metrics (chief of which being U6) better explain fluctuations in gross domestic product, inflation, and the nonfarm employment vacancy rate when compared with narrower metrics such as U3. These findings question the conventional wisdom of U3’s long-standing role as the principal unemployment indicator upon which to base macroeconomic policy.