Is a Higher Unemployment Rate in an Improving Economy Actually a Good Thing?

By | February 18, 2015 at 9:59 PM |

Overall, last week’s jobs report was filled with good news. The economy added 257,000 jobs in January — that is the 12th consecutive month that employers have hired over 200,000 workers.

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The Labor Department even revised 2014 figures, explaining that close to 150,000 more jobs were created in November and December than previously recorded. “These are pretty amazing numbers,” explained Nariman Behravesh, the chief economist at IHS Inc. “The January 2015 number is strong, but then you compare it to sizzling November and December 2014 numbers, then you’ve got the wage gains.”

It was, overall, an excellent report. It’s a sign that the economy is robust, and that more people who are looking for jobs are finding them.

But there was one troubling bit of information in the report: The unemployment rate is up. Between December 2014 and January 2015, the unemployment rate actually went up from 5.6% to 5.7%.

No Cause For Alarm

Could a higher unemployment rate be positive news for the economy? It might be seen as paradoxical, but in an improving economy, a higher unemployment rate might be an indication of economic growth. The issue is that the unemployment rate doesn’t take into account those who want a job but have given up looking.

In other words, someone who has been actively searching for employment for over a year and finally throws in the towel out of sheer frustration no longer counts as “unemployed.” When President Obama took office back in 2008, nearly 3 million people fell into this category. In other words, millions of people who wanted a job but didn’t have one weren’t counted in the official unemployment rating.

As the economy improves, those who have let their job search go dormant may feel motivated to start looking again. Subsequently, as they resume their search, they will be tallied in with the unemployed. So while the unemployment rate spiked up a bit last month, so did the labor participation rate, which represents the number of people actively employed or looking for unemployment.

It is arguably a better means of gauging real unemployment. The labor participation rate rose in January, up to 62.9% from 62.7%. Based on the most recent estimates, approximately one million people entered the labor force.

Looking Toward the Future

Elise Gould, who is a senior economist at the Economic Policy Institute, argued that the small jump in unemployment wasn’t a big deal. “I firmly believe that the unemployment rate increased in January mostly due to people coming back into the labor force — some of them finding jobs, some of them not finding jobs,” she said.

“If I were to predict where the unemployment rate will end up in 2015, I would project that it will hold steady and could even slightly increase. However, I don’t think we’re going to see it going down. As the market gets stronger and more people enter the labor force, the unemployment rate might start moving potentially in the wrong direction,” she added.

The good news? For once a higher unemployment rate isn’t cause for alarm! All in all, more people are participating or looking to take part in the economy. And that is most definitely good news

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