Today, we learned that the unemployment rate rose to 9.1%, even though the net number of jobs in the economy increased. That might seem odd -- how can unemployment and employment both rise at the same time? In some months, this has been attributable to data discrepancies, but in May this occurred because 105,000 more Americans who were sitting on the sidelines entered the workforce. This has actually hasn't happened very often while the unemployment rate has been high. Let's look at a little history.
Below you will find a chart showing the number of people exiting the workforce or entering from the sidelines (as opposed to through population growth). For example, in May, the population rose by 167,000 people, but the workforce increased by 272,000 people. In other words, the more people entered the workforce than can be accounted for by the increase in population. That number, 105,000, reflects Americans who had exited the workforce but reentered in May.
You'll see that this number is generally negative. In those months, this means that the population growth exceeded the growth of the workforce. In some of those months, the workforce size actually contracted. In either situation, this indicates that additional people are exiting the workforce. The pool of Americans sitting out of the job market grows larger when this occurs.
So what does this chart actually show? All those negative bars imply months where labor market growth is failing to keep up with population growth. The negative bars far outnumber the positive bars. But even before 2008, when the job losses really started stacking up, the negative bars are plentiful. Here's a bonus chart, showing the cumulative annual change in workers who enter/leave the labor force, after accounting for population changes:
This shows that the adult population has been rising faster than the size of the workforce. The aging population could have something to do with this trend persisting even in good times. Many Americans are reaching retirement age over this period and exiting the workforce.
But in the second chart, you can see how the number of people who exited the workforce swelled from 2007 through 2010, and exploded in 2009. A large portion of these Americans were likely job seekers who became frustrated looking for work and temporarily gave up.
You can see that, prior to 2007, the number of Americans existing the workforce was generally fewer than one million per year. In fact, in 2006, the number was positive. This appears to indicate that, even taking the aging population into account, since 2007 we've probably seen something like 4 million workers exit the labor market due to the bad economy.
At some point, when these workers think that it's a better time to begin looking again, we'll begin to see them reenter the workforce. We may have started to see that in May. The 105,000 that entered from the sidelines was the largest amount since August 2010. As they do enter, however, if the pace of hiring can't accommodate all of them, then the unemployment rate will rise. In that situation, the size of the workforce is increasing and the workers that fail to get jobs quickly will be technically considered unemployed.
In general, this is probably a good thing for the job market. For starters, it's better to have a more accurate picture of how many Americans are unemployed. Having them looking for jobs captures them in the official statistics. If more Americans are looking for jobs, then there's also a better likelihood that firms will find the best candidates suited for their job openings, as the pool of applicants will be larger. Finally, motivated job seekers will often either make new job openings materialize through networking or take jobs that they would have passed over earlier. In both situations, this will likely increase economic activity, as workers' potential won't be sitting stagnant.
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