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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 (DJINDICES: ^DJI  ) and S&P 500 (SNPINDEX: ^GSPC  ) both surged by more than 1% each on the news.

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  • Report this Comment On June 08, 2013, at 10:44 PM, eimersd wrote:

    John Maxfield,

    Your logic is nonsense! You write as though those 300k+ people who "entered the job market" didn't exist before last month.

    You need to exam the factors that contributed to their drop-off from the labor participation rate in the first place. Namely, the failed Bush 2nd term paving the way for this absurd Obama presidency we are living through where he says he is against the very policy is is causing.

    This new normal is not good enough for this American. I only hope the rest of my compatriots will see the light.

  • Report this Comment On June 09, 2013, at 11:59 AM, 12yogi wrote:

    There is no such thing as logic or accuracy when reading and understanding twisted or skewed statistics developed by the govt. They are twisted and skewed to make things look good for the party in power and skewed to make the other party look bad. Anyone taking government statistics at face value is an idiot!

  • Report this Comment On June 09, 2013, at 12:06 PM, SLTom992 wrote:

    The present employment hasn't been this low since 1983 and most of the added jobs are part time or near minimum wage jobs.

    All the increase in the unemployment means is that the minimum wage earners are being laid off at their 90 day mark to allow the companies to not give them their permanent employee benefits. They will instead hire more employees in the same positions and if the economy doesn't improve they will lay them off in 90 days as well.

    I do not blame the businesses for this. They too are on the ragged edge and if they do not do this the entire companies will be on the street.

    And at the same time they are speaking about legalizing the illegal aliens. Reagan's legalization program proved that there are at the very least twice the number of illegals that are estimated by the government and so we could be looking at some 30 million illegals and deporting them could open MANY jobs as well as sharply diminish federal aid paid for by the taxpayers.

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