What’s Good About Rising Unemployment

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More people are lining up for jobs via Reuters

The Department of Labor reported August job numbers on Friday, and the numbers appeared to be another bad sign for the recovery. The economy lost 54,000 positions in the last full month of summer. Worse, the unemployment rate rose for the first time in four months to 9.6%, from a rate of 9.5% the month before.

So is this jobs report the latest sign that we are headed for a double dip? Probably not. Actually it’s the opposite. Despite what it looks like, today’s jobs numbers are good news for the economy. Mark Zandi, a closely watched economist, had this to say on CNBC when the job report was announced, “It solidifies the idea the economic recovery is going to remain intact.”

What’s going on here? First of all, a good part of the job losses came from the government. If you just look at the private sector, the economy actually added 67,000 positions. People getting off government payrolls and being hired by corporations or small businesses is a good sign. That’s the handoff hopefully between the stimulus and economic growth kicking in. But the bigger point may be this: The unemployment rate, probably the most famous of economic gauges, may actually be a very bad indicator of how healthy the economy is.

What economists know very well, but most of the rest of us do not is that the unemployment rate never hits 0%. It never even gets close. In fact, even in good times, the unemployment rate has been creeping up over time. During the 1960s, the unemployment rate was below 4% for nearly four years, going as low as 3.5%. During the amazing late-1990s-early-2000s economic boom, though, never got as low as that. The unemployment rate touched 4%, dipping below that only briefly for just a few months. In 2008, the rate dropped to around 4.5% and that was the best it got. In fact, for most of the time during the housing market and credit boom that was the late 2000s, the unemployment rate stood at 5%-7%.

The unemployment rate peaked in late 2009 at just above 10% and has been mostly falling ever since. But the hiring numbers, or less firing numbers, have only been improving recently. So what was going on? The unemployment rate tracks not just how many people have jobs, but how many people are looking for jobs. And, up until August, the number of people looking for jobs was dropping rapidly. When people give up looking for work, essentially giving up on the economy, that indicates a really bad drop in confidence, something a recovery feeds on. So the reason the unemployment rate was rising dropping has less to do with more people getting jobs, and more to do with fewer people looking.

What went on in August was exactly the opposite. According to today’s report, 550,000 people entered the workforce in August. That’s a huge jump of new people looking for work, either because they haven’t worked before or because they decided that this was the month to get back off the couch and start looking. With that many people entering the workforce, the fact that the unemployment number only rose 0.1% is quite a good thing. In fact, more than half of those people who began looking for work in August, or 290,000, landed a job in August.

It is possible that coming at the end of the summer an uptick in people looking for work is not as positive as it appears. This is the time of year, after two hot months, when recent graduates start to actually think about their future and send out resumes. And you can image many other out of work people deciding to take off looking for a job in the summer. In August, with the summer ending, some of those people started looking again in earnest. But you would expect the big uptick in post-summer people searching for work to come in September. So the fact that it is coming early is a good sign.