The good news about the rising US unemployment rate

The Labor Department's latest data reveals that the US economy gained 187,000 jobs in August, while the unemployment rate saw a minor increase from 3.5% to 3.8%. This is the highest unemployment rate since February 2022, but it doesn't provide the complete picture.

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In the previous month, there was a significant influx of 736,000 individuals seeking employment, the largest since January this year. This surge in the labor force participation rate - the percentage of Americans who are either employed or actively job hunting - is the reason for the increased unemployment rate, as this measure only includes Americans actively seeking employment.

With this rise in job seekers, the participation rate is now at 62.8%, the highest since February 2020, or just before the covid-19 pandemic brought the American economy to a halt. If we only consider "prime-age" workers (those aged between 25 and 54), the participation rate is the highest it's been in over two decades.

The job market is undoubtedly experiencing a slowdown. Since June, the US economy has added 449,000 jobs, the lowest three-month total since 2020. Wage growth has also decelerated, with average hourly earnings increasing by a mere 0.2% in August. However, there was an actual increase in the total number of employed Americans - it's just that there are now more people seeking employment.

All these factors are positive for the economy. The slowdown in wage growth indicates that the Fed's interest rate hikes are preventing the economy from overheating, while the current job growth rate - approximately 150,000 new jobs a month - suggests that the labor market should be able to accommodate an increase in the participation rate without a significant rise in unemployment.

During the pandemic, the number of people actively seeking employment fell drastically, reflecting the extreme circumstances and the associated economic downturn. The recovery in the participation rate indicates progress in job market accessibility and the overall strength of the economy. The increase also likely signals that the labor shortage that troubled American businesses in 2021 and 2022 is easing.

This combination of more people seeking employment and slowing wage growth increases the likelihood of the inflation rate continuing to decline. This could potentially prompt the Federal Reserve to postpone another interest rate hike at its upcoming policy meeting later this month.

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