New economic data shows continued signs of strength in Kentucky’s economy, despite rising unemployment 

Observers of economic news have noted that the unemployment rate for both the United States and Kentucky has been rising, causing some to fear a weakening economy or a looming recession. While it is true that unemployment has been steadily ticking up, other metrics and analysis by economists paint a more complicated picture of current economic conditions in which we see continued signs of growth and opportunity. 

Starting with one of the largest measures of the economy – jobs – Kentucky has been adding new jobs almost every month since the recovery from COVID-19 started in the summer of 2020. In fact, in January 2023, Kentucky surpassed 2 million jobs on record for the first time in its history. Since then, Kentucky has added 34,000 more jobs. Last month, the state registered a preliminary decline of 5,600 recorded jobs from the previous month, most of which came from the manufacturing and government sectors. However, a drop in the month of July is not uncommon. Similar drops occurred in July 2023 and July 2018. Compared with this same time last year, July 2024 showed 23,800 more jobs in Kentucky.

Information on job growth comes from a federal government survey of employers, which excludes agricultural and self-employed workers. A separate federal survey of households provides additional perspective. The two surveys sometimes show conflicting information. It is important to remember that they are measuring different things and surveying different populations.   

The household survey shows that Kentucky’s overall workforce and workforce participation rate have been rising. This is good news. Strengthening our workforce has been a key priority of the business community and state policymakers. While Kentucky’s total workforce – the number of Kentuckians with a job and those looking for a job – is still below pre-pandemic levels, it has risen steadily through 2024, adding almost 30,000 workers since the first month of the year. Meanwhile, workforce participation – which measures the share of the adult population in the workforce – has risen 0.7 percentage points during this same time period. 

This is not to say that Kentucky is without its fair share of workforce challenges. The state’s workforce participation rate in July 2024 was 5.1 points below the nationwide average, at 57.6 vs. 62.7. Similarly, as the Kentucky Chamber Center for Policy and Research recently showed at a legislative committee hearing in Frankfort, the Commonwealth is facing a shrinking pool of 25-54 year-old workers. These dynamics make it harder for Kentucky employers to find workers and stunt economic growth in the state. (Readers can learn more about Kentucky’s long-term workforce challenges here.) Nonetheless, rising workforce participation in the Commonwealth throughout 2024 is positive news. 

So what is going on with the unemployment rate? Traditionally, this metric has been viewed as a reliable indicator of recessions and ailing economic health. In Kentucky, the unemployment rate has been rising since April 2023, increasing from 4.0 percent to 4.7 percent. This rise began shortly after Kentucky reached its lowest unemployment rate on record with a recording of 3.9 percent in March and April of 2022. July data showed 96,259 unemployed workers in Kentucky, an increase of 9,105 since January 2024. 

Unemployment measures the share of the workforce that includes individuals who do not have a job but are actively looking for one. (If an individual does not have a job and is not looking for a job, they are not considered unemployed. Instead, they are simply not part of the workforce.) 

Unemployment levels and the unemployment rate tend to increase when workers are laid off and seek new jobs, when individuals without a job start looking for one, or a mixture of both. The key driver right now appears not to be layoffs but more people entering the labor market and looking for a job. Dr. Mike Clark with the University of Kentucky’s Center for Business and Economic Research made this point in a recent analysis of the state’s July economic data. “Kentucky’s higher unemployment rate for July is due to more people entering the labor force rather than fewer people working,” said Clark.

Evidence for this dynamic comes from different sources. While unemployment levels have been rising, employment levels have gone up faster. Employment in Kentucky has increased by more than 20,000 since January vs. a 9,105 rise in unemployment. Employment levels rose 4,801 between June and July vs. an increase of 1,488 in unemployment levels. If unemployment was rising primarily due to permanent layoffs or widespread job losses in the state, we would expect some amount of decline in employment levels – not an increase. 

Further evidence that higher unemployment is being driven by new workers entering the labor market comes from unemployment claims. Often when workers lose their job from a layoff, unemployment claims tick up as laid-off workers file for benefits. But claims have been largely stable throughout 2024. July did see a slight uptick in benefit claims, but claims fell in early August. In addition, claims throughout 2024 have generally been about half of what they were prior to the pandemic.

Permanent layoffs are not driving the national unemployment rate either. Dr. Michael Strain with the American Enterprise Institute noted in an August 8 article titled, “The American Economy is Not Rapidly Deteriorating,” that multiple factors are driving up the national unemployment rate, including new workers. “Yes, the unemployment rate went up from 4.1 percent in June to 4.3 percent in July,” wrote Strain. “But the current level of the unemployment rate is not particularly troubling. More importantly, the unemployment rate went up for idiosyncratic factors. Hurricane Beryl disrupted the labor market. The unemployment-rate increase was driven by temporary, not permanent, layoffs. And the unemployment-rate increase was also driven by new entrants into the labor market.” 

So what does it mean that unemployment in Kentucky is rising largely due to new entrants to the labor market? Key variables likely include recent immigrants looking for work, workers who left the labor market during COVID and are just now returning, higher wages enticing would-be-workers off the sidelines, and possibly higher prices pushing some folks into the workforce. But as these non-working individuals seek employment opportunities, they may face challenges, such as skills mismatches, transportation and housing barriers, and employers becoming more reluctant to hire amidst economic uncertainty and high interest rates.    

None of this, of course, means that a recession could not be around the corner. The Federal Reserve’s decision to raise interest rates to fight inflation significantly increases the chances of a cooling economy. But current data and analysis by economists suggest continued strength in both Kentucky’s and the nation’s economy, as inflation shows signs of easing. Michael Strain, in the previously cited article, summarizes the current economic landscape succinctly: 

“The bottom line is that there is little evidence that the labor market is rapidly deteriorating. Layoffs are trending down and are below their pre-pandemic level. Labor demand remains firm. Companies are responding to a gradually softening labor market by reducing hiring and job openings, not by laying off workers. The economy continues to add jobs at a solid pace. The fundamental drivers of labor demand are still present: Incomes are growing, and consumers are spending.” 

None of this information should be construed to dismiss the economic challenges that Kentucky and the nation are facing. Inflation and high prices continue to strain the budgets of both households and businesses. Rural areas of the state face stubbornly higher rates of unemployment than elsewhere. And, as a recent report by the Kentucky Chamber Center for Policy and Research demonstrates, housing shortages are holding back economic growth and harming quality of life. Despite these challenges, the fundamentals of Kentucky’s economy appear stable, as evidenced by more jobs, higher levels of employment, and a growing workforce.

To ensure Kentucky’s economy continues to be strong and that we can overcome our challenges, state policymakers should focus on pursuing pro-growth policies like tax reform and reducing regulatory burdens to help Kentucky employers increase productivity, grow their businesses, and create more jobs. At the same time, policymakers should support workforce development efforts such as increasing rates of post-secondary attainment among Kentucky workers, investing in workforce training programs, increasing access to high-quality child care, and helping individuals with histories of substance use disorder or justice involvement perform better in the job market.