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.


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.

Hurricane Sandy Likely to Increase Unemployment Rate to 8.0% or 8.1%

The November jobs report (released on December 7th) will be the first one to include household and payroll survey data gathered after Hurricane Sandy.  It is likely that November’s unemployment rate will jump from its current level of 7.9% to 8.0% or 8.1% due to Hurricane Sandy.  Sandy had a devastating impact on the tri-state area of New York, New Jersey and Connecticut where about one eighth of U.S. output is produced.  A leading indicator of the unemployment rate is the weekly report of new unemployment insurance claims.  A spike in new jobless claims means that a large number of workers were displaced from their jobs.  As I explain below, Hurricane Sandy displaced 145,000 workers as measured by new jobless claims in the first full week after the storm hit.

During the week of November 10th (the most recent week for which detailed state data are available) over 63,000 jobless workers in New York filed for first-time unemployment insurance benefits, compared to about 21,400 new claims one year ago.  Similarly, over 46,000 jobless workers in New Jersey filed for first-time unemployment insurance benefits during the week of November 10th, compared to just over 12,000 new claims one year ago.  The rate at which workers lost their jobs nearly quadrupled in New Jersey and nearly tripled in New York compared to November 2011.

The following charts compare the year-to-year change in new unemployment insurance claims the week of November 10th, the first report to reflect Hurricane Sandy effects, and four-week moving averages of year-to-year changes in new claims over the previous 20 weeks.  For example, the annual percentage change in new claims for November 3rd is based on a comparison of data for the week of November 3rd and the three previous weeks to the corresponding weeks in 2011.  The charts indicate that, for New York and New Jersey, new jobless claims were consistently below 2011 levels until Hurricane Sandy hit.

Hurricane Sandy caused about 80,000 people to lose their jobs and file for first-time unemployment insurance benefits in one week in New York and New Jersey alone.  Although the effect of Hurricane Sandy on the rest of the country is smaller, it isn’t negligible.  The following chart compares the year-to-year change in new jobless claims the week of November 10th to four-week moving averages of year-to-year changes in new claims for the rest of the United States (excluding New York and New Jersey).  The chart indicates that new jobless claims were up about 12% in the first full week after Hurricane Sandy, or an increase of 65,000 claims.

Hurricane Sandy’s displacement of 145,000 workers in one week is enough to increase the U.S. unemployment rate by 0.1 percentage point, from 7.9% to 8.0%.  The November unemployment rate is based on worker’s labor force status for the week ending November 17th.  That means that one more week of new jobless claims data will factor into November’s unemployment rate.  The preliminary new claims data for the week of November 17th shows a smaller increase in displaced workers, probably half as many as the 145,000 displaced in the prior week.  We will know more on November 29th when more detailed and complete data for the week of November 17th are released.  At this point it is most likely that the November unemployment rate will jump to 8.0% or 8.1%.

Labor Market Pessimism

Through the first six months of the year the number of workers who quit their job is down 28.5% from 2007.  Workers do not generally quit a job if they believe it will be difficult to find a new job.  A low quit rate is a symptom of worker pessimism in the labor market.

A second indication of labor market pessimism is that although the number of workers laid off through the first half of 2012 is down 3.3% from 2007, the number of laid off workers filing for unemployment insurance claims is up over 18% from 2007.  Workers who are laid off appear more pessimistic about finding a new job than they were in 2007 because they are much more likely to file for unemployment insurance.  A laid off worker who is fairly certain to be re-employed within a few weeks is much less likely to go to the trouble of filing for unemployment insurance claims.

The labor market recovery will be weak as long as quit rates remain far below pre-recession levels and new unemployment insurance claims stay at their current rate of 374,000 per week (compared to 317,000 per week in 2007).  The pessimism of those who have recently lost jobs and those who are considering a job move suggest that the unemployment rate is unlikely to drop over the next few months.

New Jobless Claims Continue to Signal Labor Market Problems

There have been 15 weeks of new jobless claims reports released in 2012.  The average number of new unemployment insurance claims has been 392,200 per week (not seasonally adjusted).  Between 2004 and 2006, a period of modest annual employment growth of 1.7% or 2.24 million per year, the average number of new jobless claims was 328,800 per week.  Weekly jobless claims are substantially (19%) higher than they were in 2004-2006, when the economy was creating about 187,000 net new jobs per month.

New jobless claims are filed by people who have lost their jobs, so it is difficult to imagine a scenario in which new jobless claims could be much higher than they are now, given the current state of the labor market.  Data from the BLS JOLTS survey indicate that in the six months between September 2011 and February 2012, about 420,600 workers were laid off (or discharged) from their job each week, on average.  This means that in 2012 new jobless claims have been about 93.2% of layoffs per week, on average.  Between 2004 and 2006 new jobless claims were about 78% of layoffs, on average, per week.  We know that the labor market is struggling when almost everyone who loses their job files for unemployment insurance.

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.

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