Why a higher unemployment rate would be good news
The May jobs report released Friday morning showed the unemployment rate held steady at 6.3 percent and that employers added 217,000 jobs in May. That's considered pretty decent economic news and the stock market headed higher as a result.
But you know what would have been even better news? An increase in unemployment, coupled with those payroll increases.
It seems counterintuitive, but if the unemployment rate starts to rise, that could indicate that people think the economy has improved enough to rejoin the workforce. For the past four years the unemployment rate has declined in large part because people stopped looking for work and were no longer counted as part of the workforce.
The Labor Department doesn't see an increase in the size of the work force so far. "The civilian labor force participation rate was unchanged in May, at 62.8 percent," the Bureau of Labor Statistics noted Friday. "The participation rate has shown no clear trend since this past October but is down by 0.6 percentage point over the year."
But a report from Reuters recently found evidence of growth. The study found 32 states, where a majority of the nation's working-age population lives, reported an increase in labor force participation between November and April.
Although this data is volatile and shouldn't be taken as definitive proof of a reversal, it is the second straight month where most states showed gains over a six-month period. Since the end of the recession in 2009 it has been rare "for more than a handful of states to show improved labor participation over any six-month period," Reuters found.
There is additional recent evidence of a tightening job market. The Federal Reserve's Beige Book for May reported, "Labor market conditions generally improved since the previous report." It referred to flat or modest gains in employment levels in the Boston, New York, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, and Dallas Districts. " Several Districts continued to report that employers were having difficulty finding skilled workers," the Fed report found.
One of the problems with measuring labor force participation is determining who has left and why.
At the start of the Great Recession in November of 2007, the participation rate was 66 percent, according to the BLS. By April of this year, participation was down to 63.2 percent -- the same rate it was the previous October and a 36-year low. Some people have dropped out for structural reasons -- like retirement -- that would happen regardless of how the economy was doing. However, others have dropped out for what are called cyclical reasons -- the lack of job opportunities.
However, not as many retirement age people left the workforce as usually did prior to the recession. The current participation rate for those 65 and older is 18.9 percent. In the four years before the recession began it averaged 15.2 percent. At the same time, fewer young workers have joined the workforce. Currently the participation rate for those between the ages of 18 and 25 is 57.25 percent. In the four years before the recession it averaged 65.5 percent.
The argument has been made that the participation rate is lower because younger people delayed joining the workforce by going to college. But, as economist Heidi Shierholz notes, there has been no increase in recession-induced college enrollment for men or women. She writes, "It is worth noting that these missing young workers are not 'sheltering in school' from the labor market effects of the Great Recession.
