It is not a standard part of the normal economic analysis that a rise in the unemployment rate is good news. However, it is indeed so that Friday's reported rise in the US jobless rate, from 4.9% to 5.0% of the labour force, is good news. The implication of this is that the Federal Reserve is likely to be more cautious in raising interest rates in the near future. And no, that's not the good news: rather, the good news is that the Fed's current risk in leaving interest rates low seems to be paying off.
The news itself:
U.S. employment increased strongly in March, underscoring the economy's resilience, but an influx of Americans into the labor market could temper nascent wage growth and keep the Federal Reserve cautious about further interest rate increases. Nonfarm payrolls rose by 215,000 last month and the unemployment rate edged up to 5.0 percent from an eight-year low of 4.9 percent, the Labor Department said on Friday. The jobless rate increased as more people continued to enter or re-enter the labor market, a sign of confidence in the job market.
So far so rather "Meh". But this is the important part:
The labor force participation rate, or the share of working-age Americans who are employed or at least looking for a job, rose a tenth of a percentage point to a two-year high of 63 percent in March. It has increased 0.6 percentage point since dipping to 62.4 percent in September. About 2.4 million people entered or re-entered the job market since September, the second-largest increase in the labor force over a six-month period on record.
To understand this we need to grasp something important about the difference in unemployment in Europe and the US. Traditionally (that is, for the past few decades) the short term unemployment rate on both sides of The Pond has been about the same. Sure, it moves around with recessions and booms but there's no great difference as long as we adjust for the cycle. However, the US has had pretty much no long term unemployment while Europe has had ever mounting rates of that. 4 to 5% of the workforce in many continental locations.
The general analysis of this is that once someone does become long term unemployed, then it's extraordinarily difficult for them to get back into the workforce. Employers generally won't interview the long term unemployed and people do lose the habits of it: as well as lose out on experience and training.
That difference between the US and Europe rather disappeared during the Great Recession. The US saw a peak of long term unemployed up to those European sorts of levels. However, the way that US unemployment statistics work, this wasn't entirely obvious. What is usually reported is U3: those either getting unemployment insurance or at least registered as looking for work. But that insurance (now the recession is over) stops at 6 months generally. And there are people out there who become discouraged and don't register that they are still looking or have stopped looking at all.
These people are partially in the U6 measure of unemployment and partly further out, we can see them only by looking at that ratio between the labour force as registered and the population of working age. And the general consensus is that until just these past few months, there was some 2-4% of hidden unemployment out there in those numbers: European levels of long term unemployment.
This then leads to a policy prescription pushed by important people like Paul Krugman and by unimportant people like me.
Think of what the Fed's task is: 2% or so inflation consistent with full employment. So, if they're looking at the U3 numbers, they'll be looking at the levels at which inflation started to take off in the past: 5% or so. Great! Raise rates!
But hold on a moment goes this argument. We've got that hidden unemployment out there. 5% is no longer the NAIRU (non-accelerating inflation rate of unemployment) because our U3 doesn't include those long term unemployed and discouraged, something new for the US. We can keep rates lower for longer to aid them in that tough task of getting back into the workforce.
Now, whether that argument was or is true or not is one thing: it's certainly reasonable in theory. And what needs to happen is that theory be tested against the real world. At which point the Fed could leave rates low and see what happened: essentially what they have done. And there could then be two results.
That labour force to population ratio doesn't change, thus we are at NAIRU with a 4.9, 5% U3 rate and, well, oops, here comes the inflation. Or alternatively we could find that the labour to population ratio does change, more people come back into the workforce, and our real NAIRU is different. For it is, in both theory and practice, thought to be the unemployment rate among those actually looking for work which affects inflation.
So, what has happened? So many people are being attracted back into the labour force that despite healthy numbers of jobs being created that U3 number actually ticks up a bit. Excellent, our risk has paid off. We are able to attract back those discouraged workers and they are indeed able to find employment.
That is, the Fed's risk has paid off so far. From which we should almost certainly conclude that they will continue to take that risk until it no longer pays off. Thus my contention that the outcome of this is that the Fed will continue to delay further rises in interest rates. On the very sensible grounds that the effects of delay so far have been exactly what we want to happen, the discouraged come back. So, why not ride a winning bet?
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