Good news for the U.S. economy – the Bureau of Labor Statistics (BLS) announced a surge in nonfarm payroll employment in August 2022. Employment in the professional and business services, retail trade, and healthcare sectors saw gains of over 300,000 jobs while the unemployment rate rose to 3.7 percent. This information came from both household surveys asking individuals about job status and business surveys inquiring about jobs added.
The BLS also reported that all 50 U.S. states had lower jobless rates than a year ago. Although the national unemployment rate rose, it was 1.5 percent lower than in August 2021.
This is good news, but what does it mean for employers?
IS LOW UNEMPLOYMENT GOOD OR BAD?
On the surface, low unemployment may sound like a positive thing. People are working, and that is good, isn’t it? Not always. The University of Massachusetts Global explains that the unemployment rate can get too low, causing adverse effects.
One challenge of low employment is more difficult recruiting. When more people are employed, fewer people look for work, and the talent pools shrink. With more job opportunities than candidates, applicants can be more selective about what positions they accept. Employers may even see more turnover.
Low productivity can also arise from a low unemployment rate. If companies don’t offer competitive wages when the labor market is tight, they may end up hiring less qualified candidates. The resulting skills gap means less productivity and overwhelmed new employees.
Although experts disagree on exactly what it means, low unemployment could foreshadow a recession. Some think it could point to a positive shift in the economy. Others believe it means the economy could be heading for a mild slowdown, and still others think it’s an indicator of a more severe downturn to come.
LOW UNEMPLOYMENT AND DOMINANT EMPLOYERS
The International Monetary Fund (IMF) discusses low employment rates and dominant employers. Dominant employers attract large numbers of applicants without offering higher wages. They are in less densely populated U.S. areas and provide almost 10 percent of job openings in those regions.
Dominant employers are concentrated in the healthcare, agriculture, and mining industries. They are reactive to changes in the interest rate by firing workers when rates rise and hiring when rates lower. According to the IMF, the current historically low unemployment rate is likely to rise because of dominant employers and rising interest rates.
Because of this connection between changing interest rates, low unemployment, and dominant employers, a low unemployment rate isn’t necessarily a good thing. It has implications across the economy—not only for workers but also for the region. And in rural areas, dominant employers may add to unemployment due to changing interest rates.
RISING INTEREST RATES AND RISING UNEMPLOYMENT RATES
With the fourth quarter 2022 interest rate hike, the unemployment rates are also expected to rise. The IMF reports that the economy is projected to slow, which is understandable as people and companies spend less. The higher prices are in danger of becoming permanent as many workers’ wages haven’t kept up with inflation. As a result, the Fed is expected to act to restore price stability.
In the near term, this means job loss and unemployment rising from its historic low. With the economic effects of unemployment, interest rates, and inflation intertwined, a rising unemployment rate is not the red flag that it may seem. It has a lot of beneficial aspects for the economy and employers.
Additional economic risks that may lead to rising unemployment rates include global factors such as the Russian war with Ukraine, the ongoing pandemic, and more shutdowns in China. These, along with high inflation, require action from the Fed to control inflation but affect unemployment.
RISING UNEMPLOYMENT RATE GOOD FOR EMPLOYERS BUT NOT WORKERS
Rising unemployment rates are good for businesses because they expand talent pools and ease recruiting challenges. Plus, companies don’t have to offer flexible schedules, better benefits, and higher wages as they would during low unemployment.
However, higher unemployment rates still mean more people are out of work. They can also cause an end to the hiring bonuses and interview payments common in very tight job markets.
The economic forces causing this increase can make some operations more difficult and expensive, ultimately affecting employees. Rising interest rates mean companies take cost control measures, like firing employees, implementing spending freezes, and reducing expansion. Business growth slows or stops as companies adjust to economic challenges.
Reuters reports that the 22 million jobs lost at the onset of the COVID-19 pandemic have been recovered. The availability of COVID-19 vaccines for children and the reopening of schools most likely helped parents, especially women 25 to 54, return to work. But the Fed is now trying to control the inflation that has consumer prices rising uncontrollably, which will most likely impact the unemployment rate.
Even as these gains look bright, an expected 2023 recession looms. Economic recession and rising unemployment mean necessary spending adjustments for employers, workers, and households. The Fed likely won’t normalize inflation until the second quarter of 2024 when unemployment is projected to rise to five percent.