Why Did the Unemployment Rate Increase in June?

The economy is growing. The expansion is nine years old and counting. The labor market is tight. There are more job openings than there are people looking for work.

But in June the unemployment rate went up to 4.0 percent, from 3.8 percent in May. Is that just a random blip? Or is it the beginning of the end of the expansion?

Here’s some unemployment rate arithmetic. The Bureau of Labor Statistics, part of the U.S. Department of Labor, surveys U.S. residents each month to estimate how many people are employed, unemployed or in another category called “not in the labor force.” The definitions are complicated—putting all of human experience into three boxes takes some doing. But if you’re a civilian working for pay, you’re employed. If you don’t have a job but are looking for work, you’re unemployed. If you’re not employed or unemployed, but you’re 16 years old or older and not in an institution, you’re called “not in the labor force.” Most people in that category are retired, in school or running a household.

The sum of employed and unemployed people is the labor force. The unemployment rate is the number of unemployed people as a percentage of the labor force.

In May there were 6,065,000 unemployed people and 155,474,000 employed people, so the labor force was 161,539,000. That’s 6.1 million unemployed out of 161.5 million working or looking for work. The unemployment rate was 3.8 percent. The last time the unemployment rate was that low was in April 2000.

And then in June the unemployment rate went up to 4.0 percent. Let’s break it down. The labor force went up, by 601,000. The number of employed people went up, by 102,000. The number of unemployed people went up, by 499,000. Several hundred thousand people joined the labor force. Most of them were still looking for work when the Bureau of Labor Statistics came calling.

Let’s pause for a moment to point out that these changes are net figures. Yes, employment increased by 102,000. But actually, about 5.4 million people got jobs, and about 5.3 million people left jobs. The net change was an additional 100,000. We know this from a different BLS survey, called JOLT, which means job openings and labor turnover. It’s a different survey, so the numbers don’t exactly match the labor force survey, but they’re almost always close.

That gives us another pause. These numbers are from surveys. If we had asked everybody, perhaps the unemployment rate would have been 3.9 percent in May and June. Sometimes survey results change simply because you ask a different subset of people each month. A one-month change of two-tenths may not mean much.

Back to the numbers. In June almost half a million new people entered the labor force and didn’t yet have a job during the survey week.

But the economy is hot. Many of them found jobs within a month. In July the number of unemployed dropped by 284,000 while the number of employed increased by 389,000. That means another 105,000 entered the labor force. The unemployment rate fell to 3.9 percent.

We expect the labor force to grow in a growing economy. Sometimes it grows more than the number of employed people, and then the number of unemployed people grows, too.

That’s why this doesn’t look like the beginning of a recession. Consider 2008 and 2009, during the 18 months when the unemployment rate increased from 5 percent to 10 percent. In an average month, the labor force was almost unchanged, but 430,000 people moved from employed to unemployed. The number of employed people dropped for 18 months in a row.

In our economy, the number of employed people has increased in each of the last four months, averaging 197,000 per month. Labor force growth has averaged 121,000 per month.

During economic expansions the labor force increases, and so does employment. Sometimes the labor force increases more, and then the unemployment rate can rise. That’s not an indicator of recession. If the labor force stops rising, and the number of employed people falls, that would be time to worry.