Why Higher Unemployment Might Not Be a Bad Thing
Meg Handley

A rising rate could signal an improvement in the job market as discouraged workers get back in the game

While still painfully high, unemployment has been creeping down gradually since November of last year, igniting hopes of a more robust economic recovery. February's national unemployment rate dipped to 8.9 percent (the lowest in 22 months), and employers added more than 190,000 jobs, the Bureau of Labor Statistics reported. However, despite more positive economic indicators and projections that the U.S. economy could grow by more than 2 percent in 2011, some economists say we could see a rise in unemployment -- and it might not be a bad thing.

"It's a little bit counterintuitive," says Adolfo Laurenti, deputy chief economist at Mesirow Financial , a diversified financial services firm headquartered in Chicago. "It's a sign that the job market is improving."

The key question centers on how the Bureau of Labor Statistics, a division of the Department of Labor, calculates the unemployment rate and who's technically counted as unemployed. It's not as simple as just tallying jobless Americans. "The biggest thing is understanding how we arrive at the number, and what the contributing factors are," says Doug Arms, senior vice president at Ajilon, a professional staffing firm.

It starts with what the Department of Labor considers to be the workforce: employed and unemployed civilians 16 years and older. According the Bureau of Labor Statistics the U.S. workforce stood at about 153 million as of February 2011, which translates to about 64 percent of the population being eligible to work.

But from there, it gets tricky. "The crucial factor is the people who -- when the job market is weak and it's hard to find jobs -- stop looking for jobs," says Laurenti, referring to so-called discouraged workers, or those who have given up on looking for work. Because they're not actively looking for work, discouraged workers drop out of the workforce and aren't counted as unemployed. "It's the overall eligible employee confidence," Arms says. "If I am to look, what is the probability of me finding a job? If they don't feel the probability is high, many won't bother." According to some economists, the high number of discouraged workers during the most recent recession has artificially lowered the unemployment rate, because while these people are still unemployed, they aren't counted as part of the workforce or unemployed.

That could all change as job seekers' confidence is buoyed by four consecutive months of falling unemployment and a steady stream of relatively positive economic data. "You find that when things are publicized that 'Hey, things are improving,' [it] boosts the confidence level of those that haven't been looking and they start looking," Arms says. "Now you flood the market with eligible job seekers, which, unless there's a massive increase in jobs, can raise the [unemployment] rate pretty drastically."

Despite the steady flow of positive information about the labor market, it's not all smooth sailing from here. Arms cautions that to sustain the numbers seen over the past few months, job creation has to keep pace with the uptick of job seekers. According to a recent Gallup report, as of mid-March, there are still five job seekers for every one full-time position available. "A lack of sufficient job creation to increase employment among those who want to work remains a major obstacle to U.S. economic growth in the months ahead," the report said.

According to some economists, the job-creation obstacle might be particularly severe during this recovery because many of the jobs eliminated by the recession simply won't be coming back. "You have at least a couple of areas of structural change in the economy," says Richard Wobbekind, associate dean of the Leeds School of Business at the University of Colorado. "That's what makes bringing the unemployment rate down a challenge." Because of the collapse of the housing market, sectors such as construction are among the job categories expected to take a hit going forward. At its peak, construction accounted for about 6 percent of U.S. gross domestic product, Laurenti says, but after the ravages of the recession, he estimates the sector has been more than halved. "Many people working in that sector will need to find something else," Laurenti says. "They will find something else. The U.S. economy is fabulous at creating jobs. The problem is that now we are facing a little bit of uncertainty -- we do not know where the jobs will come from. We're still in this stage of transition."

Laurenti remains confident in the U.S. economy's ability to adapt, but warns that the results might be slow and incremental. "I'm confident jobs will come back. Job creation will happen. We still need to figure out what will be the next strong sector," he says. "Manufacturing seems to resurging, [jobs will] probably come from exports, which seem to be doing fairly well, health care is doing well."

In the meantime, an uptick in the unemployment rate -- economists say it could rise to more than 9 percent again -- could signal that the engines of economic recovery are revving up. "The unemployment rate is a lagging indicator. The economy has turned by the time the unemployment rate has turned," Wobbekind says. "You've already started to see the job growth occur, and we might see that unemployment rate going up because people are coming back into the workforce."