The Good News about Rising Unemployment Rates

"Rise in Washington unemployment rate seen as a good sign."

No, that's not an article in The Onion. It's not from a memo circulating among Republican strategists, or from bankers trying to securitize unemployment benefits. That's a real headline today in the Washington Post.

To explain why they might not be crazy, let's remember what the unemployment rate is. It's the number of people out of work divided by the labor force, which is everybody who counts as either employed or unemployed. But folks who aren't actively looking for work -- "discouraged workers" -- aren't counted as employed or unemployed, and they don't count in the labor force. When discouraged workers start looking for work, they count as officially jobless again. That raises the unemployment ratio, but it can also signal higher economic energy.

WaPo's sources are suggesting that DC-area workers are feeling less discouraged, which presumably means they're seeing more job opportunities. Indeed, percent of DC employers who expect to hire in the next quarter rose from 14 to 23 percent. But the most important implications of this story are national. I'll explain:

The number of total discouraged workers has soared in the last six months, from about 700,000 to 1.2 million. Here's a graph from the BLS.

unemp discouraged 10-02.PNG

Why have discouraged workers skyrocketed 70% in the same six months when the unemployment has fallen from 10.2 to 9.7 and weekly unemployment claims have generally dropped? I can't get 1.2 million people on the phone this morning, but the likely explanation is that job openings are still extremely low. The openings-to-unemployment ratio is falling but still near its all time high at 5.5-to-1. Seventy-three percent of DC-area employers say they aren't hiring in the next six months.

But these discouraged workers will come back to the labor force, putting upward pressure on the official unemployment rate. And that's where the Obama administration has a problem. As the seemingly ironic WaPo article explains, fewer discouraged workers can mean higher unemployment in the short-term. "Unemployment is up; good news!" is weird for a headline, but it's downright toxic for a political message. As the economy picks up, and Americans are encouraged to get back in the job hunt, unemployment will resist a quick fall. The administration needs to start thinking about how to explain the bright side of sticky high unemployment.