Unexpected Rise in the Unemployment Rate — Explained
In August alone, employers added 187,000 jobs, and the unemployment rate rose 0.3% from July to 3.8%, as reported by the U.S. Bureau of Labor Statistics. While the addition of 187,000 jobs was not anything out of the ordinary, the rise in the unemployment rate certainly was. The unemployment rate measures the percentage of the working population actively seeking work but can’t find it. Over the last three months (June-August), the economy has added around 449,000 jobs, an average of about 150,000 monthly. The figure below shows the monthly change in jobs from August 2022 to August 2023.
There is no one answer as to why the unemployment rate increased in August; however, a couple of likely causes could be the high-interest rates and the return of many unemployed people from the COVID-19 pandemic. We are still experiencing a boom in the labor force as more people return after leaving the workforce for a long time. Furthermore, high-interest rates could be the reason for an increase in unemployment due to business owners not feeling comfortable hiring and paying more employees when the cost of borrowing money keeps rising.
Even as the economy is adding more jobs, as shown in August, the unemployment rate is still at a low 3.8%. Below is the unemployment rate in the United States, from 2019 to 2023.
What might these percentages indicate? While it is hard to know for sure, it certainly may be a sign of a cooling labor market, which could mean a recession could potentially occur soon. A cooling labor market signifies that the economy is simply slowing down from rapid expansion. It does not mean it forces economic growth to halt entirely, yet it does slow it down enough to present some risks.
It is important to find the fine line between slowing down the economy enough to curb a rise in inflation and not stalling it so much as to increase the risk of a recession. The Federal Reserve has been looking for ways to tread this fine line of reading the constantly fluctuating economy. One strategy The Federal Reserve has deployed lately has been to ramp up interest rates in an attempt to contain inflation. In their eyes, the more they increase these rates, the less likely people will be willing to borrow money for themselves or their businesses. While this has been something that has been going on for the past few years, I don’t believe it is the answer to preventing consumers from borrowing money.
We will always find ways to continue to borrow money — no matter how high the interest rates become. Since such a large amount of money in the United States is borrowed today, I think people will keep finding ways to do so while making their businesses work. Yes, but it is a fact that the higher the rate, the less money gets borrowed. Raising rates means removing money from supply.
To recap, the unexpected rise in the unemployment rate indirectly indicates that we are potentially headed towards a recession. As mentioned earlier, the COVID-19 pandemic and the continuous increase of interest rates are more than likely linked to the unemployment percentage rise. These then lead to a cooling of the economy, which, if cooled too much, significantly increases the chance of a recession. Now, the Federal Reserve must make a call: Is the tightening done? And if they decide to lower rates, will that be enough to jump-start employment?
