Falling unemployment could add to worries about the US labor market

The official Ministry of Labor unemployment rate – the best-known indicator of the health of the labor market – counts as unemployed only those who are not working and not actively looking for a job. That leaves out the millions of people who have stopped working and looking for work since the coronavirus hit the economy in early 2020, leaving many companies struggling to hire.

Economists polled by the Wall Street Journal estimate that the department’s September employment report, which will be released on Friday, will show the unemployment rate has fallen again slightly, to 5.1% from 5.2% in August. and nearly 15% in the spring of last year.

A decline in September would be good news if it mainly reflects job growth. Economists estimate that employers added 485,000 jobs to payrolls last month, which would be a recovery from August but not as large as the monthly gains in early summer.

But the drop would be worrisome if it was also due to potential workers being left on the sidelines.

In Friday’s report, economists will closely monitor the labor force participation rate, or the share of adults working or looking for work. It has held steady at 61.7% or less since April, well down from 63.4% in January 2020.

Employers have hired millions of Americans after cutting more than 20 million jobs last year at the height of the coronavirus crisis. But America’s workforce is also 3 million fewer than at the end of 2019.

“We’re now at a point where if the unemployment rate rises, that would be a sign of a healthier economy,” said Nela Richardson, economist at human resources software company Automatic Data Processing Inc. “I’d like to see this number will increase, in the short term, because it would show that people on the fringes of the labor market think it is safe and want to return to work.

The unemployment rate is above the 50-year low of 3.5% in February 2020, but below its historical average and is expected to decline further in the coming months. Federal Reserve officials predict a rate of 4.8% by the end of the year. By comparison, the rate was 5% or more from the mid-1970s to the late 1990s.

After the pandemic took hold in the United States in early 2020 and job losses escalated, many Americans chose to leave the workforce rather than quickly looking for new jobs for a variety of reasons.

Earlier this year, employers were hoping to see the workforce increase in September, in part because improved and extended unemployment benefits would end for around 12 million beneficiaries, schools would reopen and concerns over Covid-19s ‘would fade as vaccination rates increased. Instead, the economy lost momentum last month as an increase in infections linked to the Delta variant increased some workers’ fear of returning to work in person and forced schools and daycares. to send many children home in quarantine, which made the task more difficult. for many parents to consider jobs outside of their homes.

During the pandemic, women were more likely to quit their jobs to care for children or loved ones. One concern now is that after an 18-month absence from the job market, they might be slower to come back. “The longer you sit, the harder it is to come back,” said Dr Richardson.

And some Americans who have left the workforce may never come back. The Federal Reserve Bank of Dallas estimates 2.6 million people retired during the pandemic.

Friday’s report will also be closely watched for the pace of job creation. About 1 million jobs were added to the payroll in June and July, according to the Ministry of Labor. Then, hiring slowed sharply in August, to a payroll gain of 235,000 as restaurants, retailers and some other in-person employers cut jobs as the Delta variant spread. In August, the economy had 5.3 million fewer jobs than in February 2020.

The demand for labor remains strong. At the end of July, there was a record 10.9 million unfilled jobs in the United States, according to the Department of Labor. And last month, seasonal factors and a slight easing of labor supply constraints due to the end of benefits and the opening of schools likely led to an increase in restaurant payrolls. and other hotel companies, said Greg Daco, economist at Oxford Economics.

“But just as some of the constraints on schools and provision started to ease, the health situation worsened, placing a new strain,” he said.

Friday’s report is based on investigations conducted in early September, when Covid-19 cases linked to the Delta variant were near their peak. This could have put the brakes on stronger hiring during the month. Cases calmed down over the following weeks, which could promote better gains later in the year.

“I am more optimistic about the return of workers in October and November, and this will allow more employers to fill positions,” said Carl Tannenbaum, chief economist at financial services firm Northern Trust, adding that he It will likely take three to six months before labor force participation returns to near pre-pandemic levels.

“We had such immense progress early on in bringing jobs back that it became easy to forget that the last mile was always going to be the hardest,” he said.

Write to Eric Morath at eric.morath@wsj.com