Unemployment rate rises in July: why that may be a good sign for economy

The unemployment rate ticked upward to 6.2 percent of the labor force, up from 6.1 percent the month before, according to the Labor Department. Sometimes unemployment can rise even as more people get jobs

Mike Blake/Reuters/Files
A sign posted out in front of a newly constructed In-N-Out fast food restaurant advertises for workers with a salary of $10.50 per hour, in Encinitas, California in May.

America’s unemployment rate edged up in July – and that may be a good thing.

The jobless rate ticked upward to 6.2 percent of the labor force, up from 6.1 percent the month before, the Labor Department said Friday.

The desired trend, of course, is to have the unemployment rate fall as more people get jobs.

But sometimes unemployment can rise even as more people get jobs. That’s because an improving economy can draw discouraged workers back into the labor force, based on renewed hope that their job-search efforts will be successful.

That appears to be what happened in July, according to the preliminary monthly figures just released. In the Labor Department’s survey of employers, the economy added some 209,000 jobs for the month.

And in the department’s companion survey of households (from which the unemployment rate is calculated), the estimate of total Americans employed rose by 131,000.

The unemployment rate rose because, offsetting those job gains, the number of adults in the labor force rose by an estimated 329,000 in the household survey.

“The unemployment rate [rise] needs to be looked at in the context of more people moving into the labour market, which is often an encouraging sign that more people are willing to find work,” writes Chris Williamson, chief economist at the data firm Markit in London.

The larger import: Even if the economy hums along at a decent pace as forecasters generally expect, the unemployment rate could remain a bit sticky – not falling as much as job-creation numbers imply.

If that occurs, it can be viewed as a natural phase of the recovery from a very deep recession, which left many Americans unemployed so long that they stopped looking for work and so were no longer counted in the labor force.

At a recent press conference, Federal Reserve Chair Janet Yellen talked about the issue.

“We may see that as the economy picks up steam and we see further recovery in the labor market, that those, let’s call them discouraged workers, will return either to unemployment or to employment. And as labor force participation begins to stabilize, the unemployment rate will come down less quickly.”

Having greater stability in the “participation rate,” as economists call it, is important.

In the years since the recession, the official US unemployment rate has gradually fallen from a high of 10 percent to the current 6.2 percent. The decline is a good thing, but each year since 2008 has also seen a decline in the share of US adults who are active in the labor force, either working or job hunting.

This trend, based on comparing July data for each year, holds true even if you exclude people age 55 and up (where there are a growing number of retirees) and under 25 (where many young people are in college or vocational schooling).

Another way to put it: Today there are more adults in the 25-to-54 age group than there were in 2006, but about 2 million fewer of them are active in the labor force. That suggests that the improving economy still has a lot of workers to absorb – who haven’t yet rejoined the labor force.

Many forecasters are projecting solid growth for the economy as the job market improves, wages begin to rise, and consumers feel able to spend more.

The overall trend of the unemployment rate should still be downward, even as the decline may be slowed a bit by the return of discouraged workers – including those older or younger than the 25-to-54 age group.

The kind of stabilization Ms. Yellen talks about doesn’t mean labor force participation will return to prerecession levels. That’s because the wave of baby boomers reaching retirement age is expected to be a dominant force affecting the overall share of adults in the workforce for years to come.

But, an improving economy could help boost the share of adults who have jobs over the next several years. Already, that “employment to population ratio” has been edging up at least modestly since 2011.

The White House Council of Economic Advisers, in a report last month, broke down the long-term trend in participation this way: Of the decline of roughly three percentage points in the participation rate from the end of 2007 to July 2014, “1.7 percentage point is due to the natural aging of the population and 0.5 percentage point is due to standard business-cycle effects,” meaning the ebb and flow produced by things like a recession.

“The remaining 0.9 percentage point is a ‘residual,’ that could reflect either less-well-understood pre-existing trends or a lingering hangover from the unusual severity of the Great Recession,” the report concluded.

The White House economists offered some policy steps that could put some upward pressure on participation.

For example, some extra spending on infrastructure projects could help with job creation in the near term, alongside job gains from the private sector.

In addition, government and private-sector efforts could help boost participation by particular groups. The report pointed to President Obama’s “My Brother’s Keeper” initiative, which aims to help young men of color succeed in school and work. Encouraging flexible work schedules and benefits like paid family leave, meanwhile, could help more women and older people to be in the labor force.

Immigration reform measures being discussed in Congress would also boost participation rates, the report said, since immigrants tend to be younger and to participate in the workforce at higher rates.

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