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The Rising Unemployment Rate Is Good News

The unemployment rate rose to 5 percent in March from 4.9 percent in February, according to Friday’s jobs report. That’s within the margin of error, so the Bureau of Labor Statistics officially says the rate was “little changed.” But in any case, it didn’t fall.

That might sound like bad news, and for people who lost jobs in March, it certainly is. But for the overall economy, a flat or even slightly rising unemployment rate could be a sign that the job market has room to keep improving.

Here’s why: The government counts people as “unemployed” only if they are actively searching for work. Over the past six years, the number of unemployed workers has fallen from more than 15 million to less than 8 million. At the current rate of job growth — employers added 215,000 jobs in March and have added 2.8 million over the past year — it won’t take long for the U.S. to start running out of available workers. Most economists don’t think the unemployment rate can drop much below 5 percent for long without inflation rising and the economy starting to overheat.

Or at least, that would be true if the officially unemployed were the only workers available. But they aren’t: Millions of Americans aren’t actively looking for jobs (and therefore don’t count as unemployed) but are theoretically available to work. If they could be drawn into the labor force, they would represent a huge pool of potential workers, allowing job growth to continue for longer without pushing the unemployment rate much below that 5 percent benchmark.

There are signs that that’s exactly what’s happening. The labor force grew by nearly 400,000 people in March, and the participation rate — the share of adults who are either working or actively looking for work — rose for the fourth month in a row, the first time that’s happened since 1992. As I discussed in more detail last week, most of the people joining the labor force are finding jobs right away, a sign that improving job opportunities are pulling people off the sidelines. But the number of people re-entering the labor force to look for work rose by 28,000 in March, suggesting that some people are restarting job searches they abandoned when the job market was worse.

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The participation rate is still far below where it was before the recession began in 2007. A big part of the decline is due to the aging of the baby-boom generation, so even the strongest job market isn’t likely to lead to a sustained rebound. But even adjusting for demographics, the labor force has a long way to go to get back to its prerecession level, suggesting that there is still plenty of room for the economy to keep adding jobs without running out of available workers.

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The bad news is that if the pool of workers is growing, that means there is more competition for available jobs, which will keep downward pressure on wages. Average hourly earnings rebounded in March after dipping unexpectedly in February, but the longer-run picture is one of steady but slow wage gains. Over the past year, hourly earnings are up 2.3 percent, rising faster than inflation but not enough to reverse years of stagnant growth.

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Here are a few more observations from today’s jobs report:

Job growth stays strong: March’s increase in non-farm payrolls represents a modest slowdown from February, when employers added 245,000 jobs. But the month-to-month changes mean less than the longer-run trend. The year-over-year pace of job growth, which had been gradually falling, ticked up a bit in March. The U.S. has added jobs for 66 straight months, the longest streak on record.

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Weak manufacturing: Employment in the manufacturing sector fell by 29,000 jobs in March, the second straight monthly decline. On a year-over-year basis, manufacturing jobs fell for the first time since 2010. On the one hand, the decline isn’t surprising: The slowdown in China, and the broader weakness in the global economy, has taken a toll on U.S. manufacturers, many of whom have customers overseas. But a series of positive reports in recent weeks, including one from the Institute of Supply Management on Friday, had led many economists to suggest that the worst was over for U.S. factories. If it is, Friday’s report didn’t provide much evidence.

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In other sectors, the news was mostly good. The construction industry added a solid 37,000 jobs. In the service sector, low-wage industries such as retail and hospitality added large numbers of jobs, but so did better-paying industries like finance and professional services. Unsurprisingly given the ongoing slump in energy prices, job cuts continued in the oil industry.

Rising employment rate: Perhaps the most encouraging sign in the labor market in recent months has been the strong rebound in employment among so-called prime-age workers, those ages 25 to 54. The rise has been particularly pronounced among men, who have experienced a decades-long decline in employment. The recent rebound has barely made a dent in that longer-run decline — male employment rates haven’t even gotten back to where they were when the recession began — but at least the trend is moving in the right direction.

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Ben Casselman is a senior editor and the chief economics writer for FiveThirtyEight.

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