Why a higher unemployment rate may be good news for the economy

The first month of 2015 was a good one for the labor market. The economy added 257,000 jobs and the unemployment rate ticked up (yes, up!) a tenth of a percent to 5.7 percent.

But doesn’t that mean there were more unemployed people? Yes. And here’s why that may be a good thing. The civilian labor force grew by 700,000, suggesting that at least some previously discouraged workers — those who had given up their job search — started looking for work again.

Remember that the Bureau of Labor Statistics only counts people as “unemployed” if they’re actively looking for work and are therefore part of the labor force. According to the household survey, 267,000 more people were unemployed and 435,000 more people were employed in January. The labor force participation rate increased by 0.2 percentage points to 62.9 percent.

Of course, this could also be bad news if, for example, a large proportion of retired people found themselves needing to work again, and that’s why the labor force grew. But “noisy” month-to-month data, economist Justin Wolfers told Making Sen$e in an email, makes it’s hard to break down who these 700,000 people are. Doesn’t mean he didn’t welcome that boom:

Key point: Labor force grew by +703k. They're coming back.

— Justin Wolfers (@JustinWolfers) February 6, 2015

Dean Baker, co-director of the Center for Economic and Policy Research, pointed to a separate measure to underscore growing stability in the labor market: 9.5 percent of the unemployed are unemployed because they left their jobs. Known as “job quits,” a percentage this high — the highest of the recovery, Baker said — reflects increasing confidence in the labor market. People wouldn’t quit their jobs if they didn’t feel reasonably assured they could find another one.

So perhaps some of those newly returned to the labor force are unemployed by choice, looking for a job that better suits their needs.

Our “Solman Scale U7,” which adds to the officially unemployed people all those who want a full-time job but can’t find one, also increased slightly from December to 13.48 percent in January. Our total possible workforce (163,190,000) is bigger than last December’s, reflecting that large bump in the civilian labor force. Meanwhile, the number of involuntary part-time workers stayed about the same, while the number of people wanting jobs declined by about 90,000.

Baker is wary of making too much of the 700,000 boost in the labor force, and from that, spinning a tale about discouraged workers returning, given that the figure comes from the notoriously erratic household survey. Plus, January’s numbers are always volatile, Baker added, because of seasonal adjustments for weather and annual benchmark revisions to the Census Bureau’s population estimates.

More encouraging, Baker thinks, is the good news out of Friday’s establishment survey. The 257,000 jobs employers added exceeded economists’ expectations of 237,000. Even more impressive, the total of the past two months’ gains was revised up by 147,000. The three month average for payroll growth is now 336,000 jobs per month. Over 3 million jobs were created during 2014.

Signaling a recovery for working Americans, average hourly earnings shot up 12 cents in January. Wages had fallen 5 cents in December after increasing 9 cents in November, underscoring the volatility of month-to-month gains. But January’s average hourly wage of $24.75 is significant because it’s 0.5 percent higher than December’s, which, according to the New York Times’ Neil Irwin, represents the largest increase since 2008. For the year, average hourly earnings are up 2.2 percent.