This month’s Employment Situation Report from the Bureau of Labor Statistics showed strong job creation, but the unemployment rate rose 0.2% to 4.0%, in an unexpected result. So is the labor market slowing? Quite the opposite. Sometimes higher unemployment is actually a good sign. In the chart below, we show two versions of the unemployment rate. The first, in dark blue, is the total number of unemployed workers, or the “headline” U3 unemployment rate. The light blue line only includes workers that have been unemployed for less than 27 weeks. That unemployment rate for only short-term workers made a new low for the cycle in June at 3.05%. In other words, only longer-term unemployed workers drove the higher unemployment rate.
The increase in long-term unemployed workers really was dramatic. It was the largest one month percent change in that category since the 1970s, much larger than spikes seen during or right after recessions. So where did all of these long-term unemployed come from if the numbers of shorter-term unemployed did not rise?
All those unemployed workers came from outside the labor force. When a worker enters the labor force after spending a long period of time outside the labor force (that is, extreme long-term unemployment or being outside the labor force for other reasons), they are counted as long-term unemployed (that is, unemployed for 27 weeks or longer, but currently looking for work). As shown in the chart below, the increase in long-term unemployed and the MoM change in the number of workers moving from outside the labor force to unemployment match almost perfectly in June. What this tells us is that hundreds of thousands of people started looking for work. Because they started job searches, they’re now counted as unemployed, while they weren’t previously.
Looking at the bigger picture, the best measure of how robust the labor market is (the ratio of those aged 25-54 who have jobs to the overall 25-54 population) returned to cycle highs in June at 79.3% (matching February’s level). This measure is now 1.0% below the mid-2000s cycle peak, 1.6% below the 1990s cycle peak, and 0.6% below the 1987-2007 average. There’s lots of room for this measure of labor market slack to improve, but it’s no longer dramatically depressed like it was in the earlier part of the expansion.
Finally, our last chart below looks at wage growth. The BLS publishes two measures: one for all private workers, and one for only production and nonsupervisory workers. The latter has a much longer history. In recent quarters the total private level has been growing faster than production and nonsupervisory wages only, but those wages have begun to catch up over the last few months and they’re now close to equal, with production and nonsupervisory wages growing at roughly the fastest pace of the expansion while total private wages sit at a slightly less strong growth rate.