The U.S. economy had another great month in February, at least when it comes to adding jobs.
American employers added 215,000 positions to their payrolls last month, bringing the average job increase for the year to more than 200,000 per month, or more than double what is needed to keep up with the growth of the population.
At the same time, though, the unemployment rate actually went up, from 4.9% to 5.0%. So what’s the deal?
First, the unemployment rate and the headline new jobs numbers are actually derived by two separate surveys. The unemployment rate is derived from a survey of households, and the new jobs figure is derived from a survey of businesses and other employers, commonly called the establishment survey. The establishment survey is much more comprehensive and therefore more trusted by economists and investors. But since it doesn’t poll actual workers, you can’t use it to figure out what percentage of the workforce is unemployed.
But the survey of households actually showed even higher job growth, 246,000, than the survey of businesses. So why did the unemployment rate rise? It’s because an even larger number of people, 396,000, joined the labor force than found jobs. And the growth of the labor force is accelerating:
This is great news for the U.S. economy. A topic of intense debate among economists is what the size of the labor force would be absent the effects of the great recession. The labor force participation rate, which is the percentage of people 16 and older who are part of the labor force, has been trending down for nearly twenty years:
The conventional wisdom in the economics community is that the labor force participation rate would have continued to decline even if the great recession never occurred, because as the nation ages the share of retired workers would grow. But just how much of the decline is due to natural forces and how much is because the economy is still weak and unable to provide good-paying jobs is open for debate.
But the recent uptick in the participation rate is evidence that this trend might just be partially reversible. And that’s a good thing because the more people can and want to work, the richer the country will be, and the more tax revenue will be available to fund programs to boost growth further and to care for those who are unable to work.
For Fed chair Janet Yellen, determining what the actual potential of the U.S. labor force is critical. It’s the Fed’s mandate to promote maximum employment while keeping inflation low and steady. But what is maximum employment? These numbers indicate that as the labor market improves, more folks are re-joining a labor market that they fled because they thought there simply weren’t jobs for them. If Yellen and her Fed colleagues determine that there are millions more such workers out there, it would justify keeping interest rates low for a long time.
On the other hand, measures of inflation have been creeping up slowly along with the labor force participation rate. “Since early 2015, wage inflation has risen by about 0.6% and annual job growth has slowed by about 0.4%,” Jim Paulsen, Chief Investment Strategist & Economist at Wells Capital Management points out in an email. “This may simply be a coincidence, but more likely higher labor costs are impacting the pace of job creation.”
If Paulsen is right that higher labor costs will soon slow job growth, than the labor market may already be at full capacity, and the Fed would be wise to continue raising interest rates soon.