Why a higher unemployment rate can be a good thing

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Why the unemployment rate rose in August

The jobless rate rose 0.2 percentage points from 3.5% in July – a level that tied with the start of 2020 as the best since 1969.

The upward movement in August was largely attributable to hundreds of thousands of people entering the job market, economists said.

The government does not count individuals as unemployed when they are not in the labor market since they are not actively looking for work. People left the workforce for a variety of reasons during the pandemic, including illness, childcare and other family responsibilities, and early retirement.

Now there are more people looking for work and they are officially counted as unemployed, which has had the effect of pushing up the unemployment rate.

About 786,000 people walked off the sidelines last month, which is a “huge” number, Pollak said.

The labor force participation rate—the share of people in the labor force relative to the U.S. population—increased 0.3 percentage points to 62.4%; that’s a rapid increase for a metric that typically moves only 0.1 points, if at all, month-to-month, Pollak said.

“There’s more willingness to work, more eagerness to find jobs and actively pursue them,” Pollak said.

Why a larger labor pool is good for employers and the Fed

In this context, an increase in the unemployment rate is not worrying in the short term, say economists.

The job market is hot, with steady job growth and plenty of openings, which means workers are unlikely to stay unemployed for long. It’s also good news for companies that are having difficulty hiring, as they have more workers to choose from.

“This means more people are participating in the labor market, and while some of those people may not yet be employed, this is promising news for employers,” said AnnElizabeth Konkel, senior economist at the site. Indeed jobs.

Labor force participation has still not fully recovered from its pandemic-era plunge, although in August it peaked during the Covid-19 recovery.

According to Daniel Zhao, chief economist at Glassdoor, a career site, participation in the “prime-age” labor force – for workers aged 25 to 54 – jumped to 82.8% in August, returning almost at its pre-pandemic level. The measure was a “star” in the jobs report, he added. Looking at this figure over time helps to control for some broad demographic trends, such as baby boomers entering their retirement years.

A larger labor pool is also a positive development for the Federal Reserve, which is trying to reduce inflation: if employers can hire workers on the fringes instead of poaching other businesses by raising wages, this could help contain inflation, according to Zhao.

“The rising unemployment rate is concerning if it continues,” Zhao said. “But the strong labor gains we’ve seen below are a really encouraging sign.”

But the risk of long-term unemployment is low, given that there are nearly two open jobs per unemployed person, economists said.

It’s hard to know why people came off the sidelines

The Labor Department does not specify why the people pulled out in August. Survey data, however, suggests that finances may play a role in some workers’ decision.

About 59% of job seekers said they felt financial pressure to accept their first job offer in July, up from 51% the previous month, according to a recent ZipRecruiter survey. Those facing serious financial hardship also increased significantly, from 12.3% to 16.6%.

The rise in the unemployment rate is worrying if it continues. But the strong labor gains we’ve seen below are a really encouraging sign.

Daniel Zhao

senior economist at Glassdoor

There’s a positive and negative to the dynamic, Pollak said. On the one hand, people may feel they need employment income as their savings dwindle and inflation weighs on household budgets, she said; on the other hand, it means that workers see an opening in the labor market.

“When your odds of winning the lottery increase, you’re more likely to play the game,” Pollak said. “People jump in and try when it’s easier to succeed.”

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