Vanguard : The measure Vanguard economist Joe Davis looks at to assess the U.S. labor market

Rebecca Katz: You know, you shared the other day a really interesting statistic about the number of the ratio of job-seekers to jobs, and you might want to share that with the viewers because it's really interesting how that's changed.

Joe Davis: It is. It is a tightness to the labor market. So economists look at hundreds if not thousands of data points. I like to distill the strength or the weakness in the U.S. economy, in the labor market just to one number. And that is the ratio of those Americans, unfortunately, that are looking for work, so they're unemployed, versus the number of job openings we have. And that ratio of unemployed to job openings got as high as 7:1 during the depths of the recession. Now for reference, it's generally 2:1, two Americans looking for every one job opening. That's generally average. And today, we are almost close to 1:1. So those, including some at the Federal Reserve, have argued that there's still a massive amount of underemployment. There is pockets of underemployment to be clear. But that said, some economists have argued there's a massive amount of slack. The Federal Reserve is making a grave mistake if they raise rates. Respectfully, they are emphatically wrong by the measure I just stated because 1:1, job openings to, unfortunately, Americans that are out of work, that is fairly tight. The only time we had a ratio that low was the late '90s, like in the peak of the dot-com bubble.

Now that said, those that are looking for work may not be matching the skills that they may require for the job openings. So we still have what we would call, there's pockets of what we would call structural unemployment, right, which is a long-term secular and social issue.

Rebecca Katz: That they're underskilled?

Joe Davis: Yes, so that implies, or it's just that the industry that needs workers is not necessarily the industry where there's more unemployed, whether that be in construction versus medical profession. And there's data that would point to stories such as that.

So why that matters is that gets to the fact that the Federal Reserve will be looking at how low the unemployment rate is, how tight that is, as well as the inflation and the further dropdown, decline in oil prices will have a clear bearing. But even if we use very pessimistic assumptions, by our modeling and by our framework, which by our understanding is very close to what the Federal Reverse, internally, is using. That indicator suggests that, for the first time since the crisis began in the middle of the summer, that the fed fund rate should be above zero. In other words, you implied that, even with somewhat pessimistic assumptions, the U.S. economy no longer requires, strongly, the sort of emergency zero-bound measure and zero money market rates that we've had to witness.

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