 | Can Rising Unemployment be a Good Sign? |
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What gives? The economy created more jobs than expected in April, but unemployment went up. The reason: many people, who had not been looking for work previously, suddenly decided to start looking and are now counted as part of the unemployed labor force. This has been going on for the past four months. But it can't last. Over time, the labor force should grow at roughly the same pace as the population.
Unemployment is calculated by subtracting the total number of employed people from the labor force (employed people plus those who want to be employed). In April, the Household Survey counted 550,000 new jobs, which brings the total of new jobs in the past four months to 1.9 million. But this surge in jobs has barely budged the unemployment rate. It was 10% in December and it was 9.9% in April. The reason is simple. According to the survey, the labor force has swelled by 1.9 million in the past four months, almost as fast as employment.
The labor force has surged at an annualized rate of 3.8%, the fastest growth in 20 years. This is about five times as fast as its long-term average growth rate. If the labor force had only grown at its long run average of 0.8%, the unemployment rate would have fallen to 9.0% in April. That's right, 9.0%.
No one knows exactly why the labor force is growing so fast, but one could argue it is because discouraged workers are beginning to look for jobs. Just knowing that people who want to work are having a hard time finding a job is painful. However, it is a positive sign that they now feel good enough about their prospects to start looking for work again. Nonetheless, the current growth rate of the labor force is unsustainably fast. As its growth rate tapers off and returns to its long-run average, the unemployment rate should fall quickly.
Understanding how the government calculates statistics is important. And for the jobs market, we see strength in just about every single part of the April report – even the rise in the unemployment rate.
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