When a Higher Unemployment Rate Isn't Necessarily Bad


The idea that a higher unemployment rate isn't necessarily bad flies in the face of logic and common sense -- that is, until you dig a bit further into the numbers of the latest jobs report.

On Friday, the Bureau of Labor Statistics announced that the May unemployment rate increased to 7.6%, up from 7.5% in April. But at the same time, the report noted that the actual number of unemployed people was "essentially unchanged." What gives?

The answer lies in how the unemployment rate is calculated. It's not, as one might assume, simply the number of unemployed people divided by the population at large. Using the latter as the denominator would skew the results, as many members of the population aren't available or qualified to work because of a disability, age, active service in the military, incarceration, or other condition or circumstance. The number that's used instead is the civilian labor force, defined as "persons 16 years of age and older residing in the 50 states and the District of Columbia, who are not inmates of institutions (e.g., penal and mental facilities, homes for the aged), and who are not on active duty in the Armed Forces."

On top of this, while it seems like a simple concept, the notion of who should be counted as unemployed isn't so clear-cut. Say, for instance, that you're independently wealthy, don't have a job, and aren't interested in getting one. Should you be included among the ranks of the unemployed and thus factored into the unemployment rate? According to the BLS, and I tend to agree, the answer is no. To account for cases like this, the government considers only people who are "jobless, looking for jobs, and available for work" as unemployed. And to add one final twist, people are considered to be looking for a job only if they've "made specific efforts to find employment some time during the four-week period ending with the reference week."

If you've followed along thus far, then you probably see that there are multiple levers that can be pushed and pulled to affect the official unemployment rate. Holding all else equal, while the rate will obviously increase if the number of employed individuals shrinks, it will also increase if a larger proportion of jobless people are actively searching for work. Alternatively, it will decrease if payrolls go up, or if a larger portion of jobless individuals stop looking for work.

So what was the case last month? All told, the employed population increased by 319,000, thanks in large part to private-sector job creation, as the number of nonfarm payrolls shot up by 175,000. At the same time, however, the unemployed population increased as well, though by a lesser magnitude of 101,000. The latter came about as previously discouraged workers restarted the job hunt -- remember, to be considered unemployed, you must be jobless and actively looking for work. But far from being bad, this is widely considered to be a good sign, because it suggests that the jobless are feeling better about their prospects of actually getting a job if they try.

To bring things full circle, then, this is the reason that a higher unemployment rate isn't necessarily bad. And it's also the reason the Dow Jones Industrial Average and S&P 500 both surged by more than 1% each on the news.

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