07/03/2014 04:06 pm ET Updated Sep 02, 2014

What Is Yellen's Unemployment Rate?

Fed Chairwoman Janet Yellen spoke with IMF President Christine Lagard at an epoch-making conference yesterday. It was epoch-making (with luminaries such a ex-Fed Chair Paul Volcker in attendance), because Ms. Yellen, by emphasizing their mandate was to "maintain price stability and maximum employment," in effect revealed which unemployment rate she and the Fed Governors really look at to determine when they should begin to raise interest rates.

And that is long term unemployment. Though payrolls have averaged 231,000 additional jobs this year, the so-called U6 unemployment rate that includes people who can only find part-time work, including those who recently gave up looking, barely improved to 12.1 percent in June from 12.2 percent.

Yellen has said several times that it was specifically the long term unemployed that she wanted back to work before the Fed would seriously begin to tighten credit. The number of long-term unemployed (those jobless for 27 weeks or more) declined by 293,000 in June to 3.1 million, said the report. These individuals accounted for 32.8 percent of the unemployed. Over the past 12 months, the number of long-term unemployed has decreased by 1.2 million.

This is when today's June 'short term' unemployment report was terrific. The unemployment rate fell to 6.1 percent from 6.3 percent, and 288,000 payrolls jobs were created. There was hiring across the board. Even governments hired 26,000 additional employees.

Professional and business jobs increased by 67,000, just 15 percent of which were temp positions, said the report. Retailers hired 40,200 workers and restaurants added 33,000. Health-care providers, another source of steady hiring, created 21,000 new positions. Manufacturers took on 16,000 additional workers. Even the finance industry, which has lagged in hiring since the financial panic in 2008, created 17,000 jobs in June. That's the largest increase in 27 months.

There is one other factor that Yellen et al are looking at: Wage and salary levels aren't increasing faster than inflation, and the average workweek was unchanged at 34.5 hours. Hours worked tend to rise when an economy strengthens, but there's been little change for months.

Average hourly pay rose 6 cents, or 0.2 percent to $24.45 in June. Over the past 12 months, wages have risen 2 percent. But wages are rising at just two-thirds the normal rate and the recovery is unlikely to be more robust unless workers start to receive bigger paychecks.

So Yellen and the Fed governors are saying don't tighten credit prematurely, as FDR did in 1937, which dragged the '30s economy back into the Great Depression. There are still too many signs of weakness, including excessive long term unemployment and insufficient demand to warrant raising interest rates, or otherwise worry about inflation.

Banks and Wall Street always worry about excessive inflation, because they are the creditors, and inflation reduces the value of their debt. But that benefits consumers, as it also reduces the amount of their debt, and excessive consumer debt has been the main drag in this recovery.

So we will not see a real recovery that puts even the long term unemployed back to work, until the mountain of private debt is reduced. And that can't happen until we create full employment policies that continue to create more jobs on Main Street, rather than worry about and abet the policies of Wall Street.

Harlan Green © 2014