What’s driving the US unemployment rate higher?

The recent uptick in the US unemployment rate to 4.1% is gaining attention and prompting a more dovish tone from Federal Reserve officials, according to analysts.

The increase in the unemployment rate, calculated from the Household Survey, is attributed to a rise in labor supply rather than job losses.

Specifically, 75% of the 543,000 year-to-date jump in unemployed individuals is due to re-entrants (353,000) and new entrants (99,000) to the labor force. The surge has contributed to a 0.27% rise in the unemployment rate this year.

Analysts suggested that the Household Survey may be understating immigration trends and indicated an even more strong labor supply than the data shows. The imbalance between labor supply and demand is particularly evident in lower-wage industries, which typically hire a higher proportion of foreign-born workers, it said.

Moreover, the Federal Reserve meeting minutes showed a shift in focus from solely inflation concerns to a more balanced approach between inflation and employment. Some Fed officials noted that while the labor market remains strong, the ratio of vacancies to unemployment has returned to pre-pandemic levels.

Analysts noted that the balance brings risks to the Committee’s dual mandate goals, necessitating careful monitoring of labor market conditions.

A number of Fed participants had noted that with the labor market normalizing, any further weakening in demand could lead to a larger increase in unemployment. The sensitivity to demand fluctuations underscores the importance of the Fed’s balanced approach, as per analysts