The U.S. unemployment rate jumped to an 18-month high of 3.8% in August. Does that mean the economy is tottering and layoffs are rising from near-record lows? Ah, no.
The big increase in the jobless rate — from 3.5% in July — stemmed almost entirely from the presence of more people in the labor force.
People generally look for a job when they think it’s easy to find one and the pay is good. That’s a sign of a robust labor market, not a weakening one.
An estimated 736,000 people entered the labor force last month, but only about one-third of them found a job. The other half million didn’t find a job right away, so they would be considered unemployed. The government includes anyone without a job who is actively searching for work in the unemployment rate.
Ergo, the jobless rate jumped three-tenths of a percentage point to 3.8%.
Digging a little deeper, the summer-jobs market for young people may have played an outsized role.
About 45% of the people who reportedly entered the labor force in August were between the ages of between 16 and 24, noted Omair Sharif, president of Inflation Insights.
As it turns out, a similar 724,000 spike in the size of the labor force took place in August 2022. And once again it was driven by an increase in young job seekers.
What’s going on? Young people working summer jobs may have simply stayed on a bit longer than the government’s employment survey could account for.
“This looks like an anomaly associated with the summer jobs market,” said chief economist Stephen Stanley of Santander Capital Markets.
What happened after August 2022? The size of the labor force fell or moved sideways for the next three months. The unemployment rate also declined.
If the same scenario plays out this fall and the labor force shrinks, the unemployment rate could drop back down again in the next few months.
There also could be another, less positive, explanation for the large increase in the number of people seeking work in August. Maybe they need the spending money to keep their current standard of living in light of high inflation and the depletion of their pandemic-era savings.
“This could also be a possible sign of stress, with households having to come back to the labor market to pay bills and maintain current spending habits,” said senior economist Sam Bullard of Wells Fargo.