Much of this improvement can be found in the unemployment rate’s fall from 6.1% to 5.8%, the first time the rate has come in below 6% since the pandemic began last year. However, in order to observe this improvement, we need to look beneath the headline 5.8% number, to how the rate is calculated. 

This is due to the unemployment rate being calculated in a way that makes sense statistically, but runs counter to most people’s intuitions. The rate doesn’t simply show the number of unemployed people in the economy, it shows the number of unemployed people who are looking for a job.

Which means that any interpretation of the unemployment rate is not as straightforward as simply eyeballing the headline number and drawing conclusions from there. It must also involve the number of people who have work, or are currently looking for work; also known as the labor force.

Which begs the question, why did the unemployment rate fall in May? Digging into the report, we find that the number of people who were unemployed; that is they do not have jobs but are looking for one, fell by 496,000. This is a large number, and is the largest drop year-to-date, albeit only over five months of data. Still, it is a significant improvement, and one in line with further economic reopening in the United States.

But what about the size of the labor force? In May, the labor force shrank by 53,000 people, a number quite a bit smaller than the fall in the number of unemployed – which is how we got May’s lower unemployment rate. Therefore, we have a marked improvement in the employment situation within the pool of Americans who can still be classified as being in the labor market; with many more people finding work rather than getting discouraged and giving up.     

However, taking a bit of shine off this positive is the lack of improvement in the labor force participation rate. Coming in at 61.6%, it remains stuck in the narrow 61.4% – 61.7% range that has been in place since June of last year. As such, while there is undoubted improvement in the labor market for those still participating, it is not yet robust and broad based enough to reach discouraged workers and bring them back into the labor force.

Finally, in line with the labor market optimism of the last few months, revisions to past jobs numbers have all come in slightly higher. April’s 266,000 number was revised upward to 278,000; and March’s blockbuster 770,000 number is now even higher at 785,000.

All in all, May’s job report was positive, regardless of how markets chose to perceive it, but the challenge for the US labor market, and economy as a whole, is getting the participation rate back up to its pre-Covid levels. This stands at 63.4% in January 2020, which is still quite a ways from where the number stands now.

The true challenge, however, lies in getting the rate back up to where it was before it embarked on its decade long downtrend. Which takes us all the way back to September 2008, just before the Great Financial Crisis, when the labor force participation rate stood at 66%!