A good way to appraise whether an aspiring student of economics is absorbing their instruction is by asking them a simple question: Is it good when the stock market goes up? New students are quick to answer yes. A rising market indicates growing corporate profits and a strong economy. Experienced students will respond with the classic economist’s answer: It depends. Was the boom the result of irresponsible fiscal stimulus? Will the increased wealth effect stoke inflation? Are growing profits due to a strong economy, or just increased leverage?
The complexity inherent in such a simple question shows why the difficulty of economics lies in the dynamics. Although economists prefer to analyze variables assuming all else remains constant, all else rarely does remain constant. Nowhere is this more evident than in the latest American employment data, released by the Bureau of Labor Statistics on September 2nd. While the headline unemployment rate ticked up to 3.7% from 3.5% a month earlier, the increase was the result of more workers looking for jobs, rather than more workers being fired.
Headline unemployment, known to wonks as U-3 unemployment, is the number of unemployed people actively looking for a job as a percentage of the total labor force. Since both the number of job-seekers and the number of people in the labor force can vary, neither the numerator nor the denominator remain constant from month to month. The result is a dynamic figure whose changes can be surprisingly unintuitive, and whose interpretations can distort the picture of the current state of the economy.
Consider that when an unemployed person becomes discouraged enough to stop looking for a job, they cease to be counted as unemployed. The unemployment rate could fall tomorrow if enough job-seekers became so disheartened that they simply stopped trying to find a job. Hardly an indicator of a robust economy. Similarly, unemployment does not factor in workers who can only find part-time employment, despite wanting to work full-time. If legions of engineers were fired, and could only find work part-time at fast-food joints, the economy would surely suffer, but unemployment would remain stable.
The most recent figures are similarly misleading absent context. A rising unemployment figure tends to spark fears of an impending recession, especially given the level of anxiety already pervasive in the market. But August unemployment rose only because the number of people in the labor force increased by about 786,000 people. Of this amount, a bit more than half found a job, while the rest are still looking. Since every additional person in the labor force adds to the denominator, but only those who quickly find a job are excluded from the numerator, unemployment will grow in the short-term as the labor force grows.
Yet a growing labor force is certainly not an indicator of a weak economy. Rather, the fact that wages are high enough to pull people back to work is a sign of strength. This type of ‘good’ unemployment is a far cry from the ‘bad’ unemployment that occurs when workers are fired. The labor market remains highly competitive, with many firms struggling to fill vacant positions. As new entrants to the labor force gradually find work, the unemployment rate should tick back down, which will better reflect economic conditions.
A growing labor force will make the Fed’s job of controlling inflation easier. Competition in the labor market should cool the wage increases that feed into rising prices. Coupled with easing commodity prices, Fed chair Jerome Powell’s goal of a soft landing may yet be attainable. So, is it a good thing when the unemployment rate goes up? It depends.
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