Why a higher unemployment rate may be good

The unemployment rate increased by 0.2 percentage points from 3.5% in July — a level that had tied with early 2020 as the best since 1969.

The movement upward in August was largely attributable to hundreds of thousands of people entering the labor force, economists said.

The government doesn’t count individuals as unemployed when they’re out of the labor force since they’re not actively looking for work. People left the labor force for various reasons during the pandemic, including illness, child and other family care responsibilities and early retirement.

Now, there are more people looking for work and they’re officially counted as unemployed, nudging up the jobless rate.

About 786,000 people came off the sidelines last month — a “huge” number, Pollak said.

The labor force participation rate — the share of people in the labor force relative to the U.S. population — grew by 0.3 percentage points to 62.4%; that’s a swift increase for a measure that generally moves by just 0.1 points, if at all, from month to month, Pollak said.

“There’s more willingness to work, more eagerness to find jobs and actively search for them,” Pollak said.

Against this backdrop, an increase in the unemployment rate isn’t worrying in the short term, economists said.

The job market is hot, characterized by steady job growth and ample job openings, meaning workers aren’t likely to stay unemployed for long. It’s also good news for businesses that are having trouble hiring, since they have a bigger supply of workers from which to choose.

“This means that more people are participating in the labor market, and while some of those individuals may not be employed yet, this is promising news for employers,” according to AnnElizabeth Konkel, a senior economist at job site Indeed.

Labor force participation still hasn’t fully recovered from its pandemic-era dropoff, though in August tied for the highest level during the Covid-19 recovery.

“Prime age” labor force participation — for workers ages 25 to 54 — jumped to 82.8% in August, nearly back to its pre-pandemic level, according to Daniel Zhao, lead economist at Glassdoor, a career site. This metric was a “star” of the jobs report, he added. Looking at this figure over time helps control for some broad demographic trends like baby boomers entering their retirement years.

A larger labor pool is also a positive development for the Federal Reserve, which has been trying to reduce inflation: If employers can hire workers off the sidelines instead of poaching from other businesses by raising wages, it could help keep a lid on inflation, according to Zhao.

“The rising unemployment rate is a concern if it continues,” Zhao said. “But the strong labor force gains we saw underneath are a really encouraging sign.”

But the risk of long-term unemployment is low, given there are nearly two open jobs per…