When an Increase in Unemployment Numbers Herald an Improvment in the Economy
60The Technical Definition of Unemployment
People are often surprised to hear what sounds like bad economic news being presented as good news.
As an economic downturn bottoms out and the economy starts to recover one of the first signs of such a recovery is an increase in the unemployment numbers. Normally, an increase in the unemployment rate is bad news as people are losing their jobs.
However, the definition of unemployment used by both economists and policy makers is the number of people who are both out of work and are actively looking for work. Of course a downturn in the economy results in people being laid off thereby increasing the unemployment numbers. This is plain bad news because it is proof that the economy is weakening. As the economy continues to weaken, unemployment will continue to rise as more and more people are laid off. However, at some point the unemployment numbers will begin to decline, not because people are returning to work but because they are becoming discouraged at not being able to find work and temporarily give up looking for work. Of course, once they cease actively looking for work, we no longer consider them to be unemployed and, instead, look upon them as having voluntarily left the labor force.
 | Amazon Price: $22.97 List Price: $28.00 |
 | Amazon Price: $24.99 List Price: $33.99 |
 | Amazon Price: $9.01 List Price: $37.00 |
 | Amazon Price: $120.02 List Price: $140.00 |
 | Amazon Price: $138.22 List Price: $155.00 |
 | Amazon Price: $8.99 |
At some point the economy begins to turn around and before this begins to show up in the statistics, out of work workers begin to see the early signs as they hear about or know people being called for job interviews or people applying and being invited to an interview rather than simply getting a post card or email thanking them for applying and promising to keep their application on file. Seeing this, some who had previously ceased looking for work begin applying again for jobs. As more people get job interviews and some start getting hired, more out of work people begin actively looking for work again.
Of course, when these people return to actively seeking work their status, in the eyes of policy makers and economists, changes from being a labor force drop out to again being considered to be unemployed.
Thus, the bad news that the number of people classified as unemployed has increased, but the good news is that these people have gone from not looking for work (and thereby no longer considered to be unemployed) to actively looking for work which returns them to the ranks of the unemployed. With business hiring again, and people looking again the numbers of unemployed soon begin to drop, but this time the drop in the number of unemployed is due to unemployed workers finding and returning to work rather than becoming discouraged and stop looking for work.
CommentsLoading...
I have also read where early in a recession company layoffs and downsizing can be a good sign. Companies cut the unproductive people and the poor performing sectors of the company. I found myself unemployed and was filing and going to the required meetings. In the meeting were a couple of men who were talking about a job they were told about and trying to figure out how to get out of an interview or not get hired. Fishing season was about to open and they still had 20 weeks of unemployment to collect. I can see why companies would want to get rid of these people, but it is difficult with some of the laws protecting workers.
Excellent article. Very educational for me. Thanks Chuck.
Ralph - you're right, this is also another leading indicator of the end of a recession. Just like the stock market which, during a recession, is down but periodically has a few good days which give people hope that the bottom has been reached and we are now in the recovery phase of the cycle only to have the market drop on them again, employers initially can't be sure that an increase in sales is signaling the start of a recovery or is just a temporary blip caused by something else. Since it is difficult and expensive to have to let people go after hiring them, employers have been turning to temp agencies for additional workers since this simply involves renting the workers with no commitment to keep them. since they haven't hired these people there is no need to lay them off if business declines again as all they have to do is to tell the agancy they won't be needing the extra workers.
This is not only a good leading indicator of the end of a recession but, working for a temp agency during a recession is a good idea for people who are laid off. Not only does this offer the opportunity for some work while times are still bad but many medium and large employers are not only not hiring any new workers themselves but relying on temp agencies exclusively for new workers at this time, they also having the temp agencies find they type of workers they want for the long term and are employing them on a temp to hire basis. This means that they first expect to keep them longer, with some actually contracting with the agencies for workers for 2 to 6 month terms and the possibility of hiring them directly after that if the increase in business proves to be long lasting.
I currently manage a vocational training program for the college I work for and a number of our graduates have found jobs through temp agencies with work for up to six months with a specific employer and the possibility of being hired directly after that. So this is a good way for people to get in position to be first in line when companies begin hiring again.
Thanks again for the comment and nice to hear from you again.
I recall reading several years ago that a Federal Reserve study indicated that increases in activity by temporary employment agencies like Manpower, Kelley, Robert Half is a leading economic indicator. As I recall the theory is that some employers respond to a sales increase first by hiring temp employees before hiring regular or "permanent" employees.
I loved this hub! It gave an explanation in a sincable way!
Thanks Chuck
mdawson17
Very Informative hub. Hopefully things should improve now.
When I read that title I said to myself, that's got to be a contradiction if ever I saw one. After I read the hub i'm wondering if I am unemployed or have left the labor force?
James A Watkins Level 8 Commenter 3 years ago
This is an excellent read. I had not thought of or heard of this angle but it makes perfect sense. Thanks for the info.