Unemployment, Labor Force, and Economic Recovery

Interesting piece of information in Bloomberg Businessweek today:

Size of the labor force. If more people are unemployed, that’s bad. But if the number of people in the overall labor force—including those with and without jobs—increases as well, it indicates people who had given up looking are being drawn back into the job search. The labor force grew by 642,000 people from April to May. It rose again in June, but by only 156,000.

What does this mean for unemployment numbers?  Well, the labor force participation rate partially measures optimism within the labor market.  During prolonged recessions and economic downturns, more individuals drop out of the labor force because they are able to find less jobs since employers are either keeping the amount of employees constant or laying them off while attempting to increase productivity.  We would see a negative growth rate in the labor force.  We can reasonably assume people are becoming discouraged--less optimistic--about finding employment.

During a sustained recovery, if people are optimistic about employment prospects, we should expect a positive growth rate in the labor force.  As in, people that were out of the labor force are coming back in, looking for work again.  I bet there are some more complicated variables here, but let's keep this conversation simple.

What does this mean for unemployment during economic recovery immediately and over the long-run after a recovery?

We would expect an uptick in unemployment immediately, as more people join the labor force, because they're more optimistic about finding a job.  This is a good sign.  Then we would expect a gradual decline in unemployment, assuming recovery is consistent.

So I don't think it's unusual that unemployment is stuck at 8.2% at the moment while there is job growth, albeit slow growth.  But this just means that the rate at which people are joining back in looking for work is greater than the rate at which the economy is producing jobs, at the moment.  That's a good sign, though.

A growing labor force is better than a decreasing labor force.  It's a sign of optimism.  Let's hope the recovery continues and fuels more optimism and jobs.

A good point to note, however, is:

The all-in jobs misery number. This category, known as U-6 among economists, includes the unemployed and the underemployed, such as those working part-time jobs even though they’d like full-time work, and those who have given up looking for work. The U-6 number has held steady at just under 15 percent for the past five months; it rose slightly, to 14.9 percent, in June. That’s not good; consumers need to feel confident in their full-time employment before they loosen the purse strings. The U-6 number is down from a year earlier, when it was 16.2 percent.

U-6 includes those underemployed and those who have stopped looking for work.  The U-6 number has held constant, potentially meaning the labor force hasn't actually grown because discouraged people became optimistic--but that younger laborers probably entered the market after graduating, therefore increasing the labor workforce (May and June are prime graduation months for college students).  

BUT: the constant rate could result from those who stopped looking for work just swooped into the underemployed category.  It's not necessarily good, but that does mean more jobs are available.  This still means individuals who stopped looking for work began looking for work again--and maybe found work (it's just not full-time, what they would have preferred).