Why the jobs picture is brighter than you think

November 4, 2013, 11:54 PM UTC

FORTUNE — As the U.S. unemployment rate falls, skepticism grows about any real improvements in the job market.

The share of jobless workers may have fallen to its lowest level since November 2008, but this comes as millions of unemployed scratch their heads wondering how the heck so? Job creation has remained soft, and a record number of working-age folks who have been actively looking for a job have given up their search. In August, the labor force shrank to its lowest level since 1978 — a time when fewer women were working.

All this would make anyone doubt the job market is in fact improving, but a report from the Federal Reserve of San Francisco suggests the outlook is better than the skeptics think. Of course, that isn’t captured in the Bureau of Labor Statistics’ monthly jobs report, which is scheduled to be released Friday.

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Economists at the Fed have come up with a handful of indicators they say are encouraging signs that the jobless rate will continue to fall for the right reasons.

One of the strongest indicators is the insured unemployment rate, which is the share of unemployed people eligible for unemployment insurance. When the job market improves, these people are typically the first to get hired, since they were likely most recently laid-off and therefore have the freshest skills.

Since January, the insured unemployment rate has fallen by more than 11%. This is a good sign, but the job market remains a brutal place for those jobless for six months or longer. The long-term unemployed make up more than 36% of the jobless, and it remains to be seen if and when employers will finally start hiring the more than 4 million people out of work.

To be sure, Fed researchers note, the number of people filing for jobless benefits has continued to drop. That’s another strong indicator that the economy will continue creating more jobs, since declines in initial claims have typically coincided with job growth. What’s more, the extent to which factories are being used, called the capacity utilization rate, is improving. The Conference Board’s jobs gap, which tracks the difference between the percentage of households that considers jobs hard to get and the percentage that considers jobs plentiful, has also been improving.

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All this could bolster the case for the U.S. Federal Reserve to ease up on its stimulus program, which has driven down the cost of borrowing to record lows to encourage more investing and hiring. Wall Street expected the central bank to start scaling down quantitative easing in September but surprised investors when it didn’t.

Researchers at the Fed insist there’s no reason to doubt improvements in the job market, but that’s something policymakers will have to decide.