New Jobless Claims Aren’t As Good As They Look

The Department of Labor announced yesterday that new jobless claims have fallen to 305,000 for the week, a six-year low.  Unfortunately, the new jobless claims figure isn’t as reliable an indicator of labor market trends as it used to be.  It says more about the continued decline in layoffs than it does about a surge in hiring.  The biggest problem in today’s labor market is a weak hiring rate for employers.  So while a lower level of new jobless claims is better than a higher level, I don’t expect this to signal a boom in job creation.

To see why layoffs aren’t the problem, as many workers were laid off in the five years since the Lehman collapse as during the real estate boom of 2003-2007.  In the five years between 2003 and 2007, in the midst of a real estate boom and economic recovery, when the unemployment rate averaged 5.2%, there were 1.86 million layoffs per month, on average.  In the five years since the Lehman collapse in August 2008, including the biggest recession since the Great Depression, when the unemployment rate averaged 8.6%, there were also 1.86 million layoffs per month, on average.  While layoff rates were elevated during the second half of 2008 and all of 2009, over the past three years layoffs have been 8.8% lower than pre-recession levels and continue to decline.

Over the past three years during our tepid economic recovery, only 4.23 million people have been hired per month, on average, compared to 5.1 million people per month in 2003-2007. 870,000 fewer people have been hired each month over the past three years compared to 2003-2007.  This great slowdown in hiring, which represents a decline of 17% compared to the previous economic recovery, is the biggest challenge facing the labor market and the economy.

Unemployment insurance data are less relevant in 2013 because of the narrow focus on relatively recent job losers.  New labor market entrants and re-entrants to the labor force, comprise about half of the unemployed but are ineligible for unemployment insurance.  Longer term unemployed workers and jobless workers who have given up their job search and dropped out of the labor force are also ineligible for UI.  For unemployed new entrants and re-entrants to the labor force, and for the millions of jobless workers who have dropped out of the labor force, a surge in hiring is needed to bring them back to work.  So while there were 3.8% fewer layoffs in the past 12 months compared to one year earlier, the fact that hiring only increased by 1.1% over the same period means that employment rates will remain low until businesses increase the pace of their hiring.

Unemployment insurance data are also less relevant in today’s economy because the fraction of unemployed workers eligible for state unemployment insurance programs is at an all-time low.  The following chart shows the percentage of unemployed workers who are job losers and have been unemployed for 26 weeks or less.  These two conditions are good proxies for the key determinants of eligibility for most state UI programs.* Since 1980, in non-recession years, about 40% of unemployed workers would satisfy these requirements.  During recession years, about 45% of the unemployed are job losers in their first 26 weeks of unemployment.  Over the past 3 and one half years, however, only about one-third of unemployed workers have been relatively recent (26 weeks or less) job losers.

losers

The fraction of jobless workers who are eligible for UI is even smaller.  If one includes workers who have dropped out of the labor force in the past year but are available for work as “jobless”, only 26% of “jobless” workers satisfy the conditions required by most state UI programs.

While new jobless claims data provide some information about the rate at which workers are losing jobs, and whether job losers appear to be finding work before filing for UI benefits, yesterday’s new claims figures must be interpreted carefully.  The labor market of 2013 is very different from the pre-recession labor market.  Layoffs continue to decline but have not coincided with commensurate increases in hiring in a weak recovery.  Most jobless workers are long-term unemployed, new-entrants or re-entrants to the workforce unable to find work, or those who have given up job search altogether and are no longer labor force participants.  Employers have hired 870,000 fewer workers per month over the past three years than they were prior to the recession.  Until hiring levels approach the 5 million hires per month that were common in 2003-2007, job growth will continue to disappoint.  Slightly lower new jobless claims per week is just one small step in the right direction.

*Unemployed workers are eligible for Federal UI benefits if they are unemployed longer than 26 weeks and reside in states where unemployment rates are sufficiently high.  Most state UI programs allow up to 26 weeks of benefits but they need not be the first 26 weeks of a worker’s unemployment spell and benefits are only available for job losers.

(Not) Leaving Las Vegas: When Unemployment Happens in Vegas the Jobless Stay in Vegas

Since February 2009 the unemployment rate in Las Vegas has averaged 13.1% and never dropped below 10.1%; it now stands at 11.5%.  Jobless workers have not left the metro area despite the persistently high unemployment rate and lack of job growth since the recession ended.  This stunning lack of out-migration, Las Vegas’ labor force of about 980,000 workers declined by less than 200 people in the past four years, is puzzling because there are better job prospects for the unemployed and underemployed in other parts of the western U.S. 

Every other state has a healthier labor market than Nevada and every major metropolitan area has a lower unemployment rate than Las Vegas.  The unemployment rate in North Dakota is 3.1% and has not been above 4.2% since February 2009.  Unemployment rates in Nebraska, South Dakota, Utah and Wyoming are 3.8%, 4.5%, 5.2% and 5.2% respectively.  The combined labor force in these states is more than 3.5 times larger than Las Vegas, and could easily absorb jobless workers leaving Las Vegas.  The labor forces in these relatively healthy states have grown by an average of less than 1.4% over the past four years.  In other words their labor markets are expanding at a steady but unspectacular rate.

The last four years stand in stark contrast to Las Vegas’ recent history.  Between 2004 and 2008 the Las Vegas labor force grew by 16.8%.  Between 2000 and 2004, a time of relatively slow economic growth for the U.S. overall, its labor force grew by 14.1%.   This means that about one-quarter of the Las Vegas labor force arrived between 2000 and 2008.  These recent arrivals came to a city in the midst of a real estate boom but have persevered through four years of high unemployment and plunging real estate values.

A comparison of Las Vegas and cities on the Gulf and Atlantic coasts that also experienced a real estate boom and bust in the past decade is informative.  Between 2004 and 2008 the labor force grew by 13.4% in Fort Myers-Cape Coral, Florida and by 12.7% in Myrtle Beach, South Carolina.  Since then their labor forces decreased by 1.3% and 4.2% respectively.  If the labor force in Las Vegas contracted at the same rate as it did in Fort Myers or Myrtle Beach, because unemployed workers left the city to find employment elsewhere, the Las Vegas unemployment rate would be 1.3 to 3.9 percentage points lower.

Labor forces have declined in many cities across the U.S., even those that did not experience a real estate boom and bust, but not in Las Vegas.  Much like the gambler who stays at the blackjack table believing his luck will change with the next shoe the people who came to Vegas for economic opportunities are hanging on and hoping that 2013 will be different.

What Happened in Vegas? Its Not Better Off Than Four Years Ago

The question “are you better off than four years ago?”, first asked by Ronald Reagan in his campaign against Jimmy Carter in 1980, has a different answer for households in different parts of the country, and for workers who differ with respect to their occupation, age, education, race, gender and work experience.  The average answer to this question belies substantial inequality in changes in economic fortunes over the past four years.  There have been economic success stories even during the depths of the deepest recession since the Great Depression.  Some small businesses and start-ups have flourished.  The stock market and corporate profits have rebounded well in the past four years.  Many individuals have found work, moved from part-time to full-time work, received a promotion, or a substantial increase in their rate of pay.

At the other end of the spectrum, there is unlikely to be a group of workers more adversely affected by the recession and weak recovery than construction workers in areas where the real estate bubble burst.  Consider building construction workers in Las Vegas, Nevada.  Four years ago there were 17,500 workers employed in building construction.  Today there are only 5,100 meaning that employment has fallen by 71% over four years.

The Case-Shiller price index for residential housing in Las Vegas has fallen by 41% over the past four years.  This means that many of the unemployed and underemployed construction workers are underwater in their homes.  Moreover, given the glut of housing, the employment prospects for construction workers in Las Vegas is likely to remain weak for years to come.

What happened in Vegas, unfortunately, isn’t confined to Vegas.  There are a number of other cities and areas, from Riverside County, California to south Florida, that are casualties of the crash in real estate markets.  Many residents of these areas lost equity in their homes.  Others lost their jobs and have been underemployed for years.  Many small businesses, especially those dependent on real estate and construction, have failed.  So whenever pundits and journalists attempt to determine whether the typical American is better off than they were four years ago, remember that there are 300 million different answers to that question.  In some parts of the country the answer is clearly no, for far too many Americans.

Workers Displaced from 2007-2011 have Struggled to Find Employment

Every two years the Bureau of Labor Statistics (BLS) surveys workers who were displaced from “long-tenured” jobs in the previous three years.  A “long-tenured” job is one which lasted at least three years prior to the job “displacement.”  A job “displacement” is a separation that occurred because:  “a plant or company closed or moved, there was insufficient work” or the “position or shift was abolished.”  Generally these longer term jobs are better jobs and “displacements” are job separations for economic reasons that occur disproportionately in recessions.  The BLS survey is conducted in January or February of even-numbered years.  The most recent data from the January 2012 survey indicates that the number of displaced workers was much higher during the 2007-2009 recession and the rate at which workers found new jobs during the recovery has been much lower than after the recession of 2001.  However the earnings received by displaced workers who were re-employed at the time of the BLS survey are similar for the recessions of 2001 and 2007-2009.

The following bar chart indicates the number of workers displaced from “long-tenured” jobs per year, over the previous three years, in BLS surveys from 1994 to 2012.  The line graph above the bar chart indicates the re-employment rates for these workers as of the survey.  On average the survey occurs about 18 months after the typical worker lost their job.  The 2010 and 2012 surveys include workers displaced in the 2007-2009 recession while the 2002 and 2004 survey includes workers displaced in the 2001 recession.

A comparison across surveys reveals that:

  • About 40% more workers per year were displaced from “long-tenured” jobs between 2007 and 2011 compared to the 1999-2003 period.
  • Workers displaced from “long-tenured” jobs from 2007 to 2011 were 18% less likely to find re-employment within the next 18 months compared to workers displaced from 1999 to 2003.

The next bar chart compares the earnings of displaced workers who were able to find a full-time job after displacement to their previous earnings, based on BLS surveys from January 1996 to January 2012.  The red bar measures the fraction of re-employed full-time workers who are paid at least 20% less than previous earnings.  The green bar measures the fraction of full-time re-employed workers who are paid least as much as they earned previously.

A comparison across surveys reveals that:

  • Workers displaced from “long-tenured” jobs between 2007 and 2011, who found another full-time job, were slightly more likely (8.5%) to experience a pay decrease of 20% or more compared to workers displaced from 1999 to 2003.
  • Workers displaced from “long-tenured” jobs from 2007 to 2011, who found another full-time job, were no more likely to receive a pay decrease of any kind compared to workers displaced from 1999 to 2003.

The recession of 2007-2009 was the deepest downturn since World War II.  The recovery since 2009 has been tepid.  This is reflected in both the number of workers displaced from jobs they held for at least three years and the low rate at which these workers found jobs during the recovery.  There are much smaller differences in the relative earnings of workers who found full-time work in this recovery compared to displaced workers after the 2001 recession.  The most troubling empirical finding is that between 2007 and 2011 only about half of workers displaced from jobs they held for at least three years were employed within the next 18 months.

New Jobless Claims Cast Doubt on Recovery Winter

Everyone seems to be impressed by the low levels of new unemployment insurance claims that have been filed in 2012.  I look at the numbers and notice how high new claims are relative to layoffs.  The data suggest that nearly everyone who has lost their job through a layoff or reduction in force files for unemployment benefits.  Before the recession, that was not the case.  Job losers are much more pessimistic about their chances of finding a new job than they should be if the economy was enjoying a recovery winter.

A little over two million new claims were filed in the first four weeks of the year.  That’s about 12% less than were filed over a comparable period in 2011, and 27% less than in 2010.  I am not surprised by this decline because there must be layoffs before there can be new jobless claims.  Unemployed workers must be job losers to be eligible for unemployment insurance.  The BLS labor turnover survey (JOLTS) indicates that layoffs have fallen even more dramatically than new jobless claims since the recession.

The following chart shows new unemployment insurance claims and layoffs each month between 2001 and 2011.  The figures are not seasonally adjusted – layoffs and UI claims spike up in January and are lowest in the fall every year.

Between 2001 and the fall of 2008 there were 19% fewer jobless claims than there were layoffs.  A disturbing pattern has emerged beginning in the fall of 2008.  Since November of 2008 about 11% more people filed for UI benefits than there have been job losses through layoffs.  Some of the excess new claimants were likely deemed ineligible for unemployment insurance.  Even so, the fraction of laid off workers who rely on unemployment insurance is at an all-time high.  This suggests job losers are pessimistic about their prospects of finding a new job and is a leading indicator that, despite what some are saying, it will be a while before hiring picks up.

Why This Recession was Different

It has been four years since private sector employment peaked.  Last week’s jobs report was the best we have seen in months and yesterday’s new jobless claims figures were promising.  It’s a good time to take a look back at the last four years and compare our current situation to previous recessions.

Construction projects and durable goods purchases are delayed in a recession which greatly reduces the demand for workers in these sectors.  From the 1970s through 2008 more than 70% of the jobs lost in recessions were in construction and durable goods.

Only one in 7 jobs heading in to the 2008 recession were in construction and durable goods.  Even though many of the jobs most vulnerable to a downturn were either outsourced or replaced by robots over the past few decades we still lost 8.8 million private sector jobs, or 7.6% of total employment, between January 2008 and February 2010.  Most of the jobs lost were in sectors that previously had been immune to recessions.

The graph below compares employment changes in the construction and durable goods manufacturing sectors in five recessions and recoveries.  In the recessions before 2008 employment in these sectors fell by 10% to 15%.  In the 1970s and 1980s employment recovered after one year of decline.  In the 1990 and 2000 recessions employment fell less sharply for almost two years and only a small fraction of the lost jobs were added back during each recovery.  The 2008 downturn combines the worst features of both types of recessions.  Employment fell sharply for two years until 22% of construction and durable goods jobs were lost.  In the two years since the recovery began job gains have been modest.

The next graph compares employment changes in the rest of the private sector.  In the recessions prior to 2008 employment fell by no more than one or two percent.  It is troubling that employment growth has been less vigorous with each ensuing recovery.  The 2008 recession is different because employment outside of construction and durable goods fell by more than 5% and remains 2.5% below the pre-recession peak two years into the recovery.

The depth of the 2008 labor market downturn is surprisingly severe when one considers the small fraction of jobs in construction and durable goods when the recession began.  More than one in five jobs in construction and durable goods have been lost since 2008, more than in any recession since the Great Depression.  Job losses in recessions used to be concentrated in these sectors and employment used to snap back as the demand for construction projects and durable goods recovered.  If the pattern of recent recoveries holds true few of the durable goods manufacturing jobs that were lost will return to the US.

The 2008 recession is unique because 6 of 10 jobs lost were in relatively recession-proof sectors, such as services, trade, and information.   Increases in durable goods orders will likely restore a small fraction of the jobs lost since 2008.  I expect the labor market to recover slowly over the next few years.

400,000 New Jobless Claims Per Week are Troubling Despite the WSJ’s Number of the Week

In Saturday’s Wall Street Journal Phil Izzo explained that the “Number of the Week” is 450,000 because employment now increases when first-time unemployment insurance (UI) claims fall below that level. In 2010 and 2011 the average number of new UI claims was 430,000 per week but employment grew by 1% per year. Previous conventional wisdom held that employment gains would occur only if new UI claims dipped below 400,000 per week.

WSJ readers learned that job losers are more likely than ever to file for UI benefits. This is why 450,000 first-time claims is the new threshold for employment growth. We should not conclude, however, that 400,000 new jobless claims per week is good news in today’s economy. It is an ominous sign that workers lack confidence in our economic recovery. Let me explain why.

First, here is the good news. When next month’s turnover (JOLTS) survey is released by the BLS it will almost surely indicate that there were fewer layoffs in 2011 than any time in the 11 year history of the survey. This is not surprising. After shedding millions of jobs in the recession, companies are no longer downsizing.

Now, here is the bad news. In 2011 nearly everyone who was laid off filed a claim for UI benefits: 21.1 million persons filed for first-time UI benefits, while 20.1 million people were laid off or discharged according to JOLTS (lagged one month to allow time to file a claim). Although workers are eligible for UI if they have been laid off but not if they quit their previous job, the Department of Labor acknowledges that some ineligible individuals apply for and receive UI benefits. This could explain why there were 105 new UI claims for each 100 layoffs last year. To put this in perspective in 2007 new UI claims were 74% of layoffs.

The “take-up” rate for the UI program has reached 100%. Nearly all job losers file for benefits because many are eligible to receive benefits for 99 weeks and even more lack confidence in the economic recovery. They are correct to be skeptical. Job openings and new hires are 30% and 25% below their pre-recession levels, respectively.

Two years of mass layoffs and downsizing are behind us. Unless we head into another recession it is impossible for new UI claims to average more than 400,000 per week in 2012. There is no guarantee, however, that employment will grow if 400,000 workers lose their jobs and file for UI benefits each week. If this continues even a modest 4% decline in hiring would eliminate all employment growth in 2012.

We’re Too Old For This Recession

The outcome of the 2012 election may well depend on the unemployment rate in November.  President Reagan was re-elected in 1984 when the unemployment rate was 7.2%, but Presidents George H.W. Bush and Jimmy Carter were defeated when unemployment rates were 7.4% and 7.5% respectively.

It is misleading to compare today’s unemployment rate to the rate 30 years ago because today’s labor force is older and more experienced.  The unemployment rate was high during the early 1980s in part because many baby boomers were in their 20’s when unemployment rates tend to be high.  The declining unemployment rate in the late 1990’s and early 2000’s was aided by baby boomers entering their prime working ages.

Voter sentiment in November may depend on whether unemployment rates by age group are unusually high.  To make this comparison, I calculate an overall unemployment rate that holds constant each age group’s share of the labor force.  Using this method, I find that age adjustments increase last month’s 8.5% unemployment rate to 9.1%, while the “age-adjusted” unemployment rates when Carter, Reagan, and George H.W. Bush faced re-election were 6.8%, 6.8%, and 7.5% respectively.

Unemployment rates in the early 1980s were “inflated” by young baby boomers entering the labor force.  Although last month’s 8.5% unemployment rate is high by historical standards, it would be even higher if it weren’t for all the baby boomers now in their 50’s and 60’s (when unemployment rates tend to be low).  A worker today faces an unemployment rate that is 2.3% higher than someone the same age faced in November 1980.

This means that the recession of 2008 is even more severe than we first thought.  The unemployment rate has averaged 8.4% over the past four years which appears lower than the 8.6% average rate during the 1981 recession, but really isn’t.  In fact, the average “age-adjusted” unemployment rate over the past four years is 8.9%, which is much higher than the average 8.1% adjusted rate during the 1981 recession.

The following graph compares unemployment rates for five recent recessions and recoveries, after adjusting for workers’ ages.  It is clear that the 2008 recession has been the deepest and longest downturn in decades.  The “age-adjusted” unemployment rate exceeded 10% for 19 straight months in 2009-2011 and remains stubbornly high.

There is no doubt that the 2008 recession is more prolonged and severe than any economic downturn since the Great Depression.  The current 8.5% unemployment rate is high by historical standards, even if I don’t adjust for the graying of the labor force.  I find that the “natural” rate of unemployment for today’s relatively experienced labor force is about 1.2% lower than it was in 1980.  Therefore unless the unemployment rate in November 2012 is 6.3% or less, voters will face a higher unemployment rate this fall than voters the same age faced when Ronald Reagan defeated Jimmy Carter.

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