Texas’ unemployment rate is among the nation’s worst — but experts say it signals a growing economy

A "now hiring" sign is seen in the window of Toro Ramen and Poke Barn April 10, 2020 in San Marcos. (Eddie Gaspar/The Texas Tribune, Eddie Gaspar/The Texas Tribune)

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For nearly two years, Texas has led the country in job growth, most recently adding more than 400,000 new jobs between August 2022 and 2023, according to a Department of Labor Statistics report released Sept. 19.

So why is the state’s unemployment rate tied for fifth-worst in the country? Texas unemployment has stagnated at 4.1% for four consecutive months, falling below the August national average of 3.8%. It hit 4% in February, and still has not returned to pre-pandemic levels, according to data from the Federal Reserve Bank of Dallas.

Far from a sign of trouble, however, economic experts say the state’s unemployment rate is actually a promising measure of the economy’s growth. The higher unemployment rate is a reflection of an expanding labor force, which has been bolstered by rising domestic migration into the state and more native residents opting to remain in Texas than any other state in the country, experts said.

“Ironically, it can go the other way, too,” said Peter Rodriguez, dean of the Jones Graduate School of Business at Rice University. “You can see the unemployment rate go down, but it will go down because of frustrated workers exiting the labor force and even exiting the state.”

The Texas labor force — which describes the number of people employed or looking for a job — topped 15.1 million in August, setting a new state record. And while both Texas and the U.S. saw around 63.4% of people participating in the labor force before the pandemic, Texas’s labor force participation rate has recovered to 64.2% as of last month. The national rate has yet to bounce back to pre-pandemic levels, hitting 62.8% in August.

Low unemployment rates can sometimes halt the economy into “paralysis,” according to Pia Orrenius, Dallas Fed vice president and senior economist. Companies benefit from having a larger hiring pool, she said, especially smaller firms, which are often the fastest growing.

“Very tight labor markets, like what we’ve seen at the national level, are actually detrimental to matching workers to jobs because it’s so hard for employers to hire,” Orrenius said. “It becomes sort of a poaching game, where the only way to get people is to steal them [and] hire them away from other companies, and that can be very disruptive.”

As Texas has added more jobs month after month, the state’s growing population — and therefore growing labor force — has been able to accommodate the rising demand for labor, Orrenius added.

However, signs of change may be on the horizon: Texas added 12,400 jobs in August, down from 28,200 jobs added in July, according to a Dallas Fed report. Orrenius said the fluctuation indicated a “very sharp slowdown,” particularly with almost zero jobs added in the private sector.

Though seasonal fluctuations are not uncommon, especially with August as back-to-school month, Orrenius said post-pandemic job growth has been gradually slowing down in the state. The Dallas Fed expects job growth statewide to dip to about 2% in the last few months of the year, close to Texas’s trend-level growth of 2.1%, said Roberto Coronado, Dallas Fed senior vice president and senior economist, at a Texas Tribune event last week.

Private sector job growth has also dipped nationwide, with private employers adding 177,000 jobs in August, a decline from 324,000 jobs added in July, according to a report from payroll processing firm ADP.

Compared to last year, Orrenius said, the sectors that have seen the least job growth this year are the ones most sensitive to fluctuations in the interest rate, including manufacturing, construction, technology and real estate. After raising interest rates 11 times since March 2022, the Federal Reserve opted not to keep the rates steady in its meeting last week.

Still, a statewide slowdown in technology hiring, especially compared to immediately after the pandemic’s damaging blow to the economy, squares with national shifts in the industry, Rodriguez said.

“There have been traditional markets in Texas that seem to be more cyclical, like energy has been mostly steady, maybe slightly rising recently, and that's been good,” he said. “But we're mostly seeing the trends that the rest of the nation is seeing.”

As for the real estate industry, Coronado said Tuesday that the continued popularity of remote work could potentially impact the state’s commercial real estate market. Especially in cities like Austin — where half the workforce was able to work from home during the pandemic — businesses are having a tough time bringing people back to the office, he said.

“That creates interesting dynamics from a commercial real estate perspective,” Coronado said. “You have infrastructure, you have a building, you have an office space not fully utilized. That comes with a cost, and then the economy has to work its way through that.”

Disclosure: Rice University and Rice University - Jones Graduate School of Business have been financial supporters of The Texas Tribune, a nonprofit, nonpartisan news organization that is funded in part by donations from members, foundations and corporate sponsors. Financial supporters play no role in the Tribune's journalism. Find a complete list of them here.