Comment: Why an uptick in jobless figure might be good news

Published 1:30 am Monday, September 4, 2023

By Karl W. Smith / Bloomberg Opinion

A passing glance at the August jobs report released Friday by the U.S. Labor Department would suggest an economy headed in the wrong direction. After all, the unemployment rate shot up to 3.8 percent from 3.5 percent in July, marking the biggest increase since the onset of the covid-19 pandemic in April 2020. A more measured look, though, reveals something completely different.

That jump in the unemployment rate was not a reflection of companies firing workers in anticipation of a slowdown, but rather because of very large 700,000 increase in the number of people looking for a job. This caused the labor force participation rate to jump to 62.8 percent, the highest since before the pandemic. (The government only counts someone as unemployed if they are both out of work but looking for work. If someone doesn’t have a job and isn’t trying to find one they are considered out of the labor force. Of course, not all of the people that entered the workforce in August found a job right away, so they now count as unemployed.)

What all this means is that more people are confident that they can find a job that meets their needs, skills and qualifications. We know that for much of the past 3.5 years, many workers chose to stay on the sidelines for a variety of reasons, including caring for dependents stricken by the pandemic or because of their own health issues. If they believe employers are willing to accommodate their needs, such as through flexible work arrangements, they are more inclined to enter in the labor force and look for a job; which they are now doing in droves.

This development is a huge help to the Federal Reserve in its efforts to tame inflation. More workers looking for jobs reduces the need for employers to pay up to attract help. While employers fighting each other to pay you more money might sound like a good thing, too much of it can make the overall economy worse by putting upward pressure on inflation as companies pass on higher labor costs by raising the prices of their goods and services. Indeed, the jobs report showed that average hourly earnings rose 0.2 percent from July, the smallest increase since February 2022.

Fed Chair Jerome Powell has long cited the strength in wage growth as one of the reasons the central bank was having a tough time bringing down the inflation rate. Powell also said in a major speech he just delivered at the Fed’s annual late summer Jackson Hole symposium that he stood ready and willing to push benchmark interest rates even higher and keep them there if that’s what it took to bring down inflation.

The not-so-subtle subtext was that the Fed was willing to kneecap the labor market to reduce the pressure on employers to raise prices. August’s jump in labor force participation makes Powell’s threat less likely as employers will have an easier time finding workers without the need for big wage increases. What we have is a labor market that is neither so tight that it makes it hard for the Fed to bring down inflation, nor one so loose that it’s setting the stage for an economic downturn.

This latest labor market report is also another example of how the economy continues to deliver pleasant surprises. Coming into 2023, the consensus among economists was that a recession was all but assured. Now, though, economists are tripping over each other to raise their forecasts for how fast the economy will expand this year. The economists at JPMorgan Chase wrote in research note Thursday that they now expect gross domestic product to expand at a 3.5 percent annualized rate this quarter, up 3 percentage points from what they forecast at the start of August.

It’s starting to look like the economy might pull off the type of soft landing that even the best and brightest thought would take a miracle.

Karl W. Smith is a Bloomberg Opinion columnist. Previously, he was vice president for federal policy at the Tax Foundation and assistant professor of economics at the University of North Carolina.