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Implications of continuing high initial claims -- correction [ClearOnMoney]
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Implications of continuing high initial claims -- correction

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Commentary

Implications of continuing high initial claims -- correction

19 May 2010 by Jim Fickett.

Last week, in Implications of continuing high initial claims, I tried to give a more quantitative form to statements often made relating the level of initial claims and the direction of the monthly changes in non-farm payrolls. Based on further data, I now think that, rather than making such statements more quantitative, one should avoid them altogether.

James Hamilton, one author of the Econbrowser blog, has written insightful posts in the past on initial claims so, after I wrote Implications of continuing high initial claims, I emailed him and asked for feedback. He confirmed my impression that statements relating initial claims and non-farm payrolls are often based on rather superficial analysis, and also pointed me to an interesting post on the Bonddad Blog. Bonddad takes the approach of trying to find recessions that are as similar as possible to the one we just went through, and then guiding the analysis on the basis of that comparison. He says,

The 1973-4 and 1981-2 recessions are much better comparisons. They were the two most severe post-WW2 recessions up until now, respectively featuring 9% and 10%+ unemployment. Furthermore, peak initial jobless claims in those recessions were 560,750 on February 1, 1975 and 674,250 on October 9, 1982, respectively; both peaks being much closer to our recession's peak initial claims number of 658,750 on April 4, 2009.

In the case of the recoveries from both of those recessions, payrolls started to grow as the ievel of initial jobless claims crossed 500,000, not 400,000.

For illustration, here is a graph showing initial claims and non-farm payrolls for the second of these recessions (graph courtesy of the Federal Reserve Bank of St Louis; click for larger image).

It is true, of course, that different recessions have different characteristics, and Bonddad may be right that one should pick the best comparison. However this approach has serious disadvantages. First, he is comparing absolute numbers, but the population grows about 1% per year and the time in question was 28 years ago. Second, it is always very difficult to know which aspects of a historical comparison matter and which may be allowed to diverge. As I pointed out in the older post, the unemployment compensation system has changed quite significantly since 1982.

Paul Kasriel has noted that the year-over-year change in initial claims is fairly well correlated with the year-over-year change in non-farm payrolls. This may be worth pursuing. However, although the correlation is not bad, the two series often diverge significantly for long periods.

Thinking about the fundamentals, initial claims are only loosely related to job losses, and job losses are only one half of the story for net job creation (the other half being, of course, hirings). So there is no reason to expect a particularly strong relationship between initial claims and non-farm payrolls. It is probably best not to try to take the relationship too far.