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US employment tutorial 3: initial jobless claims [ClearOnMoney]
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US employment tutorial 3: initial jobless claims

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Commentary

US employment tutorial 3: initial jobless claims

11 Nov 2009 by Jim Fickett.

The key value of initial jobless claims is that they are close to the ground, giving a quick readout on current conditions. They are thus a leading indicator for several more complex statistics. One must exercise care, however: jobless claims constitute a very noisy series and tend to be overinterpreted in the news. Also, the law on eligibility has changed substantially over time, and several other factors have brought about major shifts in uptake; thus long-term comparisons are not meaningful. The key thing to watch is the trend over a few months.

“Initial claims”, “jobless claims”, “initial jobless claims”, “initial unemployment claims” – and certainly other phrases – all refer to the series produced by the Employment and Training Administration (ETA) of the Department of Labor, and called, by them, [unemployment insurance] “initial claims”.

Each state manages the unemployment insurance program within the state, funding claims via a wage tax. The ETA coordinates and supervises all the state programs. There is some room for variation in the rules, but the system overall is designed at the federal level, by Congress. To qualify for compensation under the unemployment insurance program, one must be in certain groups of employees (not including, for example, the self-employed or certain seasonally-employed workers), must have been let go rather than quit voluntarily, must have worked for a minimum length of time, and must have earned a wage exceeding a certain threshold.

The main interest in initial claims is that they are reported very quickly – only a week after the application for compensation is made – and are a leading indicator for other series. Within the employment sphere, changes in initial claims lead changes in non-farm payrolls by a few months. The graph at the left shows the year-over-year change in initial claims (thin black line) and the year-over-year change in non-farm payrolls (thick blue line). Note each major peak and trough in initial claims precedes that in non-farm payrolls (click on graph for larger image).

More broadly, initial claims are used by the Conference Board as one component of the well known Leading Economic Index, and initial claims tend to bottom a few months before recessions start and peak about at the ends of recessions. (Changes in continuing claims tend to be very similar to those in initial claims; it suffices to watch one series.)

Note that while most employment situation statistics, including non-farm payrolls and the unemployment rate, have been carefully designed to give comparable readings over the years and to represent, as well as possible, a key underlying concept, initial claims are an accidental statistic. The program was designed to meet social and political criteria, and the statistic is an afterthought. In this regard, it is important to note that Congress has significantly changed the eligibility requirements at least 10 times over the years, and changing levels of unionization, population shifts between states, and changes in taxation have all affected uptake. Thus long-term comparisons of the numbers are not meaningful.

(This change in the law was amusing: “P.L. 94-566 … The Unemployment Compensation Amendments of 1976. Effective January 1, 1978 … Requires State UI laws to prohibit payment of benefits: To a professional athlete between successive seasons who had “reasonable assurance” of reemployment …” – gosh, professional football players have to make do with just millions?)

One has only to look at the chart at left to see another caveat – the weekly numbers are highly volatile, and changes of up to about 25,000 can easily occur randomly (click for larger image). The attraction of attention-grabbing headlines is always a danger in the financial and economic news, but the initial claims, being a leading indicator, seem to attract an unusual amount of unsupported commentary. Despite the week-to-week noise, the trendline, on a scale of months, is quite clear, and gives important information on the direction of the job market and economy.

In addition to the direction, the level is, of course, key. The rule of thumb is that initial claims in the range of 300,000 to 325,000 coincide with neutral conditions in the job market, i.e. with job growth matching population growth.

Looking back at the above graph, then, it is clear that job losses are definitely in a downtrend, but still above the neutral level. That is, we can expect the overall number of jobs to continue shrinking for a while, but at a pace that is, at least for now, fairly steadily decreasing.

For more information and data supporting the assertions in this tutorial, see the reference page US unemployment claims background.