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[2015-11] Calculation of LMCI and Examination of Its Uses

Group :
Research Department 2016.01.31 3882

  In this paper, a labor market conditions index (LMCI) is calculated by combining data from individual Korean labor market indicators, providing an overall assessment of labor market conditions. To reflect the various information on the labor market, a total of 10 indicators are used in the calculation: the private-sector employment rate, the labor force participation rate, the unemployment rate, the underemployment rate, the temporary employment rate, the layoff rate, the voluntary retirement rate, the wage growth rate and the average working hours per week. The calculation is done through two methods ─ the principal component analysis, and this analysis combined with dynamic factor analysis. The results of the calculation show that the LMCI provides useful information as an indicator of labor market slack, which is highly correlated with economic conditions. In particular, the LMCI is found to more closely follow economic conditions than individual indicators, which suggests that it can be used as an effective indicator for economic assessment based on overall labor market conditions. Accordingly, as economic indicators currently fail to accurately reflect economic sentiment, the LMCI can be used as an alternative for assessing economic sentiment through its reflection of labor market conditions. In addition, while the unemployment rate gap plays only a limited role as an indicator of workers not in employment, the LMCI is useful as an indicator measuring overall labor market slack by combining various information on the labor market. In order to improve the use of LMCI, it is necessary to regularly monitor whether the indicators it is composed of accurately reflect the Korean labor market. It is also necessary to continuously examine the usefulness of including additional indicators such as the broadly-defined unemployment rate, and determine how well alternative employment rate indicators, such as the wage-earner employment rate, represent the employment situation. Finally, additional surveys and other such measures should be used to better reflect labor market sentiment.