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.