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US unemployment claims background [ClearOnMoney]
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US unemployment claims background

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Reference

US unemployment claims background

This page is about the definitions of the numbers from the unemployment compensation system, their value as economic indicators, and rules for their interpretation.

Summary

20 May 2010.

Initial unemployment claims are reported weekly and represent “real people standing in actual unemployment insurance lines … not based on samples with model guesstimates folded in” (Kasriel) and hence are a useful immediate indicator of emerging trends. The law on eligibility has changed substantially over time, and several other factors have brought about major shifts in uptake; thus the main emphasis should be on short-term trends. Claims are volatile; usually the YOY change or the four-week moving average is used; the YOY change has the advantage of at least roughly normalizing for changes in the rules and for population. Since coverage is short, the number of continuing claims, or 'insured unemployment', runs nearly parallel to initial claims; only one series need be followed. Initial claims tend to bottom several months before a recession starts and to peak at about the end of a recession. The YOY change in initial claims tends to lead the YOY change in non-farm payrolls by about 5 months, and to lead ISM manufacturing new orders by about three months. Various ranges of initial claims have been proposed as neutral for non-farm payrolls. None of these has strong support.

Highlights

Entries below covered through 8 Sep 2009.

  • Changes in uptake (11 Nov 2009) Comparison of claims numbers over the long term are not be meaningful.
    • See 9 Dec 2008 entry for a few excerpts from an 83 page DOL Employment and Training Administration document summarizing changes in the law. Substantial changes in the rules for which employees are covered have occurred at least 10 times.
    • See 8 Sep 2009 entry for economic research on long term changes in utilitization of unemployment insurance. Changing levels of unionization, population shifts between states, and changes in taxation have all affected uptake.
  • Conference Board leading indicators (31 Jul 2009) The monthly change in the four week moving average of initial claims is one of the components of the Leading Economic Index (LEI) of the Conference Board, who suggest that the six-month change in the LEI is a good predictor of recession.
  • Definition (6 Apr 2008) “Unemployment claims” means filings for state unemployment benefits.
  • Extended unemployment benefits (11 Jan 2009) Extended benefits, also called Emergency Unemployment Compensation, extend the period of unemployment benefits, typically from 26 to 39 weeks, but sometimes longer, during times of particular economic duress. Extended benefits were first introduced in 1958; congress tends to adjust the law several times during each recession, so that the law has changed many times. The insured unemployment rate, both at the national and at state levels, plays a role in deciding when to trigger extended benefits. Not surprisingly, then, insured unemployment does not include those on extended benefits.
  • Funding (31 Jul 2009) Funding is via a state wage tax. States keep their reserves with the US Treasury, and are able to borrow from Treasury if need be. The states have reduced their taxes over time, and reserves were lower than normal at the beginning of the 2007ff crisis.
  • Purpose (11 Jan 2009) While the unemployment rate and non-farm payrolls, for example, are constructed explicitly to be informative economic indicators, unemployment claims are an accidental statistic. Congress invents, and frequently changes, the rules for unemployment benefits, with social and political ends in mind.
  • Unemployment claims, continuing
    • Definition (11 Jan 2009) Often called “continuing jobless claims”, and reported as “insured unemployment” by ETA, this is the number of people receiving benefits. The Insured Unemployment Rate (IUR) is the number of people receiving benefits divided by the number of people who are qualified to receive benefits. Note that the IUR is only used as an unemployment rate per se in unusual circumstances; the program excludes many classes of workers by design – e.g. certain seasonal workers, the self-employed, those employed by certain non-profits, and those whose unemployment is due to their own actions – and the IUR also excludes those who have exhausted their benefits.
    • Indicator (31 Jul 2009) Continuing claims and the Insured Unemployment Rate are sometimes put forward as leading indicators. Changes in continuing claims run parallel to those in initial claims (see 9 Jul 2009 entry), and initial claims are conceptually a little simpler.
    • Noise (7 Dec 2007) A movement of 100,000 is noise.
    • Recent baseline (22 May 2008) In early 2006 the total hit a trough of about 2.5m and has been rising since.
  • Unemployment claims, initial (Also called initial claims, or initial jobless claims.)
    • Close to the ground (11 Jan 2009) Initial unemployment claims represent “real people standing in actual unemployment insurance lines … not based on samples with model guesstimates folded in” (Paul Kasriel)
    • Leading (1 Aug 2009) Included in the Conference Board index of leading economic indicators. When YOY NSA initial claims are shifted relative to YOY NSA non-farm payrolls [NFP], the best correlation occurs when initial claims lead NFP by 5 months; similarly, YOY NSA initial claims shows good correlation with ISM manufacturing new orders, NSA, 12 month moving average, three months later. See also the 6 Dec 2007 entry for a graph showing clearly that the raw number of claims bottoms some months before a recession starts, and the 9 Apr 2009 entry, for a graph showing that initial claims usually peak near the end of a recession.
    • Noise (7 Dec 2007) A move in the four week moving average of 25,000 or so is noise.
  • Two measures parallel (8 May 2009) See 9 Jul 2009 entry for a graph showing initial and continuing are closely parallel. It suffices to watch one.

Not covered

A number of claims have been made to determine a level of initial claims consistent with neutral growth in non-farm payrolls. None of these enjoys wide support, and we do not find the evidence convincing. Hence such claims are not covered.

Sources

  • The Employment and Training Administration of the Department of Labor for both initial and continuing claims (the latter are referred to as “insured unemployment”). On the DOL ETA home page, www.doleta.gov, click “Latest Unemployment Data” in the left sidebar; from there clicking on “Full Report” will give the latest press release, while clicking on “Weekly claims data” will lead to a retrieval form for historical data.

See also

Selected commentary

Using jobless claims as a leading indicator

Dec 2000. Conference Board methodology handbook

http://www.conference-board.org/pdf_free/economics/bci/BCI-Handbook.pdf

“Business Cycle Indicators Handbook”

”[For each component that goes into the Leading Economic Index] (1) Calculate month-to-month changes … (2) Adjust the month-to-month changes by multiplying them by the component’s standardization factor … (3) Add the adjusted month-to-month changes (across the components for each month) … (4) Compute preliminary levels of the index using the symmetric percent change formula. The index is calculated recursively …

[One component is:] BCI-05 Average weekly initial claims for unemployment insurance: This series measures the average number of new claims for unemployment compensation (only first-time filings for a specific episode of unemployment) per week (averaged over a four-week span that best covers each month). The source is the U.S. Department of Labor, which makes adjustments for predictable seasonal variation. The number of new claims filed for unemployment insurance is typically more sensitive than either total employment or unemployment to overall business conditions, and this series tends to lead the business cycle. Because initial claims increase when employment conditions worsen (layoffs rise), this series is inverted when included in the leading index (i.e., the signs of the month-to-month changes are reversed). …

[The resulting index leads the business cycle:] A more comprehensive rule—also based on historical analysis—shows that downward movements in the leading index of one to two percent over six months, coupled with declines in more than half of the components, can be reasonable criteria for a recession warning.”

Interpreting the insured unemployment rate

16 Sep 2002. Center on Budget and Policy Priorities.

http://www.cbpp.org/9-13-02ui.htm

“THE AUGUST UNEMPLOYMENT RATE MASKS THE SEVERITY OF THE DOWNTURN AND THE PROBLEMS OF THOSE EXHAUSTING THEIR UNEMPLOYMENT BENEFITS. By Wendell Primus and Jessica Goldberg”

“The measure of unemployment used here is the insured unemployment rate (IUR), which measures the number of workers that are receiving regular, state-funded unemployment insurance benefits. One advantage of this measure is that since, in most states, an unemployed worker must have a minimum level of earnings and weeks of work history to qualify for unemployment benefits, the IUR measures unemployment among experienced workers with a significant labor force attachment. By contrast, the overall unemployment rate figures also include people who have not recently been working or looking for work, such as new entrants and re-entrants into the labor market … Although the IUR is a better measure of unemployment among experienced workers than the official unemployment rate, it has several defects itself. Of special note here, the IUR does not take into account experienced workers who have been unemployed for such a long period of time that they have exhausted their regular unemployment benefits, which typically end after 26 weeks or less. These workers do not count as unemployed in the IUR. Thus, unemployed workers who are receiving additional weeks of federally funded unemployment benefits or who have exhausted their benefits — that is, workers who presumably have had the most trouble finding a job and whose economic situation is especially perilous — are not counted by this measure.”

The IUR is not an unemployment rate

19 Oct 2004. Congressional Research Service at Cornell University.

http://digitalcommons.ilr.cornell.edu/cgi/viewcontent.cgi?article=1250&context=key_workplace

“Employment Statistics: Differences and Similarities in Job-based and Person-based Employment and Unemployment Estimates. Julie M. Whittaker”

“This paper defines and distinguishes two commonly used groups of employment estimates: payroll employment (derived from a job-based survey) and employment and unemployment (derived primarily from a person-based survey) statistics. (A third unemployment statistic derived from the Unemployment Compensation system, the Insured Unemployment Rate, is less frequently used as it excludes many groups of workers.) …

The IUR … excludes several important groups: self-employed workers, unpaid family workers, workers in certain not-for-profit organizations, and several other, primarily seasonal, worker categories. In addition to those unemployed workers whose last jobs were in the excluded kinds of employment, the insured unemployed exclude the following: those who have exhausted their UC benefits; new entrants or reentrants to the labor force; disqualified workers whose unemployment is considered to have resulted from their own actions rather than from economic conditions, and eligible unemployed persons who do not file for benefits. Because of these and other limitations, statistics on insured unemployment, cannot be used as a count of total unemployment in the United States.”

Initial claims YOY as a leading indicator of NFP YOY

9 May 2005. Northern Trust Company Daily Economic Comment.

http://www.northerntrust.com/library/econ_research/daily/us/dd050905.pdf

“Whom Do You Trust – BLS or ETA? Paul L. Kasriel”

“The 274,000 reported increase in April nonfarm payrolls led many analysts to conclude that the first quarter slowdown in economic growth was just a temporary “soft patch.” … The ETA has been publishing data of late suggesting that the labor market is cooling off and that the economy is too. So whom do you trust – the BLS or the ETA?

We place more trust in the ETA. Why? For starters, the ETA reports on real people standing in actual unemployment insurance lines. The initial jobless claims data are not based on samples with model guesstimates folded in of the number of new hires of new businesses. Although there are revisions to the initial claims data, they tend to be smaller than the revisions to the nonfarm payrolls data. Both the BLS and ETS publish employment/unemployment data seasonally adjusted as well as unadjusted. Seasonal adjusting is an art, not a science. So, we prefer unadjusted data. By the way, we are not the only ones who seem to trust the ETA initial claims data over the BLS nonfarm payrolls data when it comes to forecasting in which direction the economy is headed tomorrow rather than where it is today. The Conference Board has chosen to put initial jobless claims in its leading index and nonfarm payrolls in its coincident index. …

Now let’s see why initial jobless claims are a leading indicator and nonfarm payrolls are a coincident indicator. Chart 2 shows that the highest correlation (0.68) between these two series occurs when the change in initial jobless claims leads changes in nonfarm payrolls by five months (the scale for the change in initial jobless claims is inverted in Chart 2.) …

[To see the chart, follow above link to the original article.]

let’s look at the relationship between these two measures of the employment environment and series relating to the strength of the economy that never gets revised – the unadjusted new orders index of the ISM report. … The relationship between the year-over-year percent change in initial jobless claims (on an inverted scale) and the 12-month moving average in new orders is shown in Chart 4. The highest correlation is 0.74. Although this correlation is slightly lower than the one with nonfarm payrolls, claims lead new orders by three months. …

[To see the chart, follow above link to the original article.]

In sum, we trust initial jobless claims over nonfarm payrolls to tell us where the economy is going for three reasons. Firstly, claims tend to get revised less radically than do nonfarm payrolls. Secondly, claims lead payrolls. Thirdly, claims lead measures of economic activity whereas nonfarm payrolls lag or, at best, are coincident with measures of economic activity.”

Rules for interpreting initial claims numbers

6 Sep 2007. Briefing.com

http://www.briefing.com/Investor/Public/Calendars/EconomicReleases/claims.htm

“On a week-to-week basis, claims are quite volatile, and many analysts therefore track a four week moving average to get a better sense of the underlying trend. It typically takes a sustained move of at least 30K in claims to signal a meaningful change in job growth.”

IUR denominator

30 Nov 2007. Schwab backgrounder.

http://www.schwab.com/public/schwab/research_strategies/market_insight/1/4/schwab_guide_to_economic_indicators_jobless_claims.html?refid=P-1045905

“Schwab Guide to Economic Indicators: Jobless Claims. by Christopher Burdick”

“The insured unemployment rate or jobless rate is a calculated by dividing the number of insured unemployed by the number of employees that are considered covered or eligible for unemployment insurance. Covered employees represent those working as well as those receiving unemployment benefits.”

A bottom in initial jobless claims usually precedes the beginning of recessions

6 Dec 2007. Northern Trust Daily Global Commentary.

“Jobless Claims Data Reinforce View that Labor Market Conditions are Soft. Asha G. Bangalore”

http://web-xp2a-pws.ntrs.com/content//media/attachment/data/econ_research/0712/document/dd120607.pdf

“Initial jobless claims are a leading indicator of business cycles. As seen in Chart 3, initial jobless claims establish a bottom well before the onset of a recession and peak toward/after the end of the recession. Looking back historically, initial jobless claims establish the low reading for the cycle, on average, about eight months prior to the peak of a business cycle. On average, initial jobless claims have risen by 11.8% from their lows to the peak of a business cycle. In November 2007, jobless claims averaged 338,000, up 10.5% from the low reading of May 2007 when initial jobless claims were 306,000. The longest period between the cycle low reading of jobless claims and the peak of the business cycle was 12 months in the 1960 and 2001 cycles and the shortest period was 4 months in the 1981 cycle.”

[To see the chart, follow the above link to the original article.]

Changes in who is covered

9 Dec 2008. DOL ETA chronological summary of relevant law. 83pp

http://workforcesecurity.doleta.gov/unemploy/pdf/chronfedlaws.pdf

“CHRONOLOGY OF FEDERAL UNEMPLOYMENT COMPENSATION LAWS”

[Note: not all relevant law changes summarized here. This is just to give some idea of how much the law varied. Very substantial coverage changes in 1939, 1948, 1952, 1954, 1958, 1960, 1970, 1976, 1996, 1997. Note that states have some discretion on the rules (e.g. 1994 change), so to be exhaustive one would have to review all the state laws as well.]

”[Instituted in 1935] …

P.L. 76-379, approved August 10, 1939 (HR 6635) … Adds further coverage exclusions, including: Newsboys under 18, Student nurses and interns in a hospital, Insurance agents or solicitors on commission only, Domestic service in a college club or fraternity, Casual labor not in the employer’s trade or business, Students employed in a school where they are enrolled, if they earn $45 or less in a calendar quarter. Extends coverage to: Federal instrumentalities not wholly owned by the Federal Government, such as national banks and State bank members of the Federal Reserve System, Instrumentalities not wholly owned by State and local governments, unless they have constitutional immunity. …

P.L. 79-291, approved December 29, 1945 (HR 4489) exclusion from coverage for service performed for an international organization. …

P.L. 79-719, approved August 10, 1946 Extends coverage to maritime service. Provides that a State can cover the crew of an American vessel if the operating office is within the State. … exclusion from coverage of services performed by a fisherman except for commercial halibut or salmon fishing or on a boat of more than 10 net tons. …

P.L. 80-492, approved April 20, 1948 … exclusion from coverage for services performed by a news agent.

P.L. 80-642, approved June 14, 1948 (H.J. Res. 296) Amends FUTA, following a Supreme Court decision, to limit the term “employee” to an employee under the common law rule of “master-servant” relationship, retroactive to 1939. Federal coverage was withdrawn from some 500,000 persons, including outside salesmen. …

P.L. 81-734, approved August 28, 1950 (HR 6000) … Amends FUTA to redefine exclusion for casual labor not related to the employer’s usual course of business. …

P.L. 82-550, approved July 16, 1952 (HR 7656). Veterans Readjustment Assistance Act of 1952. Establishes the Korean War Program (UCV), which provides up to 26 weeks of benefits at $26 a week or a maximum total of $676 to unemployed veterans of the Korean conflict discharged between June 27, 1950 and February 1, 1955. …

P.L. 83-196, approved August 5, 1953 (HR 5303). Amends FUTA to permit States to cover services performed by general agents of the Secretary of Commerce in connection with American vessels owned or chartered to the U.S. under [certain conditions] …

P.L. 83-591, approved August 16, 1954. Amends FUTA to include organizations that test for public safety in the list of nonprofit organizations for which services are excludable.

P.L. 83-767, approved September 1, 1954 (HR 9707). Extends coverage to Federal civilian employees employed after December 31, 1954, subject to benefit provisions of State laws, under Title XV of the Social Security Act, the Unemployment Compensation for Federal Employees (UCFE) program. Extends coverage, effective January 1, 1956, to employers of four or more workers in 20 weeks in a calendar year. …

P.L. 85-848, approved August 28, 1958 (HR 11630). Ex-servicemen's Unemployment Compensation Act of 1958 (UCX). Establishes a permanent program to provide benefits for veterans under the law of the State in which a claim is filed to coincide with the end of special coverage for Korean veterans. …

P.L. 86-778, approved September 13, 1960 (HR 12580). Social Security Amendments of 1960. Effective January 1, 1961, coverage under the UCFE program is extended to certain instrumentalities that were neither wholly nor partially covered by FUTA, such as Federal Reserve banks, land banks, and credit unions. Effective January 1, 1961, Puerto Rico is brought into the Federal-State system. Coverage is extended to employees on American aircraft working outside the United States; nonprofit institutions not exempt from income tax; “feeder organizations” of nonprofit institutions; and various employees of certain income tax-exempt organizations (except persons who earned less than $50 in a calendar quarter or who were students). …

P.L. 87-256, approved September 21, 1961 (HR 8666). Mutual Educational and Cultural Exchange Act of 1961. Amends FUTA Section 3306©(18) by providing an exclusion for services performed by a nonresident alien while temporarily in the U.S. as a nonimmigrant. …

P.L. 91-373, approved August 10, 1970 (HR 14705). Employment Security Amendments of 1970. … Extends coverage, effective January 1, 1972, to: Employers who had one or more employees performing service in 20 weeks in a calendar year or a quarterly payroll of $1500; Nonprofit organizations of four or more employees (excluding churches, religious organizations, and primary or secondary schools), State hospitals and State institutions of higher education (by requiring States to provide mandatory coverage); Outside salesman and agents and commission drivers; Certain categories of agricultural processing workers; and U.S. citizens working for American firms outside the U.S. (who are required to file their benefit claims in person within the U.S.); College faculty and other professional workers in colleges are covered but are not eligible for benefits (based on college employment) in summers or between terms if they have a contract to resume such work. States can exclude, from otherwise required coverage, students’ spouses employed by schools under certain conditions, and workers in hospitals in which they are patients. …

Effective January 1, 1972, State laws are required to include these provisions: Benefits may not be paid in a second successive benefit year unless the claimant had some employment since the beginning of the preceding benefit year. Benefits may not be denied to workers who are in approved training. Benefits may not be reduced or denied because a person who has worked in one State files his claim in another State or Canada. States must participate in arrangements for combining wage credits when the earnings are in two or more States. …

P.L. 94-566, approved October 20, 1976 (HR 10210) The Unemployment Compensation Amendments of 1976. Effective January 1, 1978, extends coverage to: Agricultural labor for employers with 10 or more workers in 20 weeks or who paid $20,000 or more in cash wages in any calendar quarter; Household workers of employers who paid $1,000 or more in any calendar quarter for such services; State and local governments with certain minor exceptions; Employees of nonprofit elementary and secondary schools. The Virgin Islands is permitted to become part of the Federal-State unemployment insurance system. … Prohibits disqualification for unemployment compensation benefits solely on the basis of pregnancy. … Requires State UI laws to prohibit payment of benefits: To a professional athlete between successive seasons who had “reasonable assurance” of reemployment; To an alien not legally admitted to the United States for permanent residence; To a claimant receiving a pension: weekly benefits would be reduced by the amount of the weekly pension (Effective October 1, 1979); To a claimant based on services performed for educational institutions in instructional, research, or principal administrative capacities during periods between academic years or terms if an individual has either a contract or reasonable assurance of employment for both the prior and forthcoming academic terms. Permits States to deny benefits based on services performed for educational institutions during periods between school terms to nonprofessional employees of primary and secondary educational institutions if an individual is employed at the end of the prior term and there is reasonable assurance he or she will be so employed during the forthcoming term. …

P.L. 97-35, approved August 13, 1981 (HR 3982) Omnibus Budget Reconciliation Act of 1981 … Amends the Unemployment Compensation for Ex-Servicemembers (UCX) program: Disqualifies UCX individuals who left the military at the end of term of enlistment and were eligible to reenlist. No change in prior requirement that individual must have served at least 365 or more continuous days in military service to qualify. Effective for all separations from the military which occurred on and after July 1, 1981, with respect to weeks of unemployment which occurred after date of enactment, August 13, 1981. …

P.L. 97-248, approved September 3, 1982 (HR 4961) Tax Equity and Fiscal Responsibility Act of 1982 … Modifies coverage FUTA coverage provisions: Removes age limitation (22) for exclusion of wages paid to student interns. Effective date: upon enactment (September 3, 1982); Extends for two years – from January 1, 1982 to January 1, 1984 – the prior exclusion of wages paid to certain alien farmworkers who are admitted for a temporary period of time. Effective date: January 1, 1982; Provides for a one-year period, for exclusion of wages paid for services performed in organized summer camps by individuals who are full-time students during the school year. … Permits States to deny UI payments to non-teaching, non-research, and non-administrative employees of colleges and universities during periods between academic years or terms, if there is reasonable assurance that the individual will be employed by the institution at the beginning of the forthcoming academic year or term. This makes Federal law consistent toward such employees of educational institutions. … Excludes from FUTA (and FICA) coverage of certain direct sellers and real estate sellers who are licensed direct sellers of real estate or who execute an agreement with an employer in which substantially all remuneration is based on sales or output (commission). …

P.L. 103-296, approved August 15, 1994 (HR 4277) Social Security Independence and Program Improvements Act of 1994 … giving States the option of excluding from coverage services performed by aliens who are admitted to the United States under a “q” visa. …

P.L. 104-188, approved August 20, 1996 (HR 3448) Small Business Job Protection Act of 1996 … Amends section 3306©(1)(B) of FUTA, to reinstate and make permanent the FUTA exemption for wages paid to certain aliens (known as H-2A workers) who are admitted to the U.S. to perform agricultural labor. This provision is effective for services performed after December 31, 1994. …

P.L. 105-33, approved August 5, 1997 (HR 2015) Balanced Budget Act of 1997 … Amends FUTA to permit States to exclude from coverage services performed as an election official or election worker if the amount of remuneration received by the individual during the calendar year for services as an election official or election worker is less than $1,000. Coverage was previously required. Effective for calendar years beginning after date of enactment. Amends FUTA to exclude from coverage services performed by persons committed to a penal institution. Effective for services performed after January 1, 1994. Amends FUTA to permit States to exclude from coverage services performed for an elementary or secondary school which is operated primarily for religious purposes, which is described in section 502©(3), and which is exempt from tax under section 501(a). Coverage was previously required. Effective for services performed after date of enactment. …

P.L. 106-554, approved December 21, 2000 (HR 4577, HR 5662) Consolidated Appropriations Act, 2001. Amends FUTA to treat Indian tribes (governmental entities and any subdivision, subsidiary, or business enterprise wholly owned by the tribe) similar to State and local governments, meaning that: Services performed in the employ of tribes generally are no longer subject to the FUTA tax. As a condition of participation in the UI program: Services performed in the employ of tribes, are with specified exceptions, required to be covered under State UI law. Previously, coverage was at the option of the State.”

Balance sheet of unemployment insurance

3 Feb 2009. Urban Institute publication.

http://www.urban.org/publications/411835.html

“Unemployment Insurance: Current Situation and Potential Reforms. Dr. Wayne Vroman”

“Recipients of so-called regular UI benefits (the program that pays benefits up to 26 weeks in nearly all states) increased from 3.1 million in May-June [of 2008] to 4.5 million in December. An added 1.6 million received Extended Unemployment Compensation (EUC) during December. Recipients of regular UI and EUC represented 55 percent of the unemployed during the month. … During most years, program beneficiaries average some 35 to 40 percent of all unemployed persons. …

The states finance UI benefits with payroll taxes paid by employers into state trust funds maintained at the U.S. Treasury. State balances earn interest income. The Treasury also makes loans to states whose trust funds have been exhausted. At the end of 2008, trust fund balances were low in several states, and three (Indiana, Michigan, and South Carolina) had already borrowed to maintain benefit payments to eligible workers. During December, four other states also requested and received authorizations to borrow from the Treasury (California, Kentucky, New York, and Ohio). All four of these states borrowed from the Treasury during January 2009 and combined end-of-month indebtedness for the seven programs totaled $2.1 billion. Depending upon the severity of the recession, some 10 to 20 states will have to borrow during 2009. The present trust fund situation is the most serious faced by the states since the early 1980s.

A common measure of UI trust fund adequacy is the reserve ratio multiple (RRM), also termed the high cost multiple [the fraction of a year that reserves would last at the highest historical payout rate]. … The recommended standard for solvency is that the pre-recession RRM equal 1.0, e.g., the fund hold twelve months of reserves measured at the high-cost payout rate. … The RRM at the end of 2007 was 0.36 … about a third of the recommended actuarial standard and represented roughly four months of benefits at the highest-ever payout rate. The aggregate RRM at the end of 2007 was lower than prior to any recession since the late 1970s. …

States needing loans to pay UI benefits can borrow in a number of ways. The traditional source is the Treasury. Loans taken during the first nine months of the year do not carry interest charges if fully repaid by September 30th and no further borrowing occurs before the end of the year. Longer-term loans carry interest charges with interest rates levied at the same rate as interest paid on positive state trust fund balances at the Treasury. … If loans are outstanding for two years, an automatic repayment mechanism is activated that collects added FUTA taxes as long as debts are outstanding using tax rates higher than the standard 0.8 percent levied on FUTA taxable wages. …

States’ UI programs have also secured loans in the private bond market in recent recessions. … Higher payroll taxes were then levied on employers in later years to repay the private loans. …

The states that borrow often enact legislation to improve solvency and prevent a recurrence of borrowing in subsequent downturns. Solvency adjustments typically include both tax increases on employers and benefit reductions for claimants. …

Since 1983, the FUTA tax has been levied at a rate of 0.80 percent of covered wages taxable under the FUTA tax base of $7,000 per worker per year. These tax receipts are divided, 80 percent directed into the federal trust fund that finances the administration of UI, ES, and other services (the Employment Security Administration Account or ESAA) while 20 percent flows into the Extended Unemployment Compensation Account (EUCA). The EUCA account pays half the benefit costs of Federal-State Extended Benefits (EB) program and the benefit costs of emergency federal programs, such as the Extended Unemployment Compensation (EUC) program enacted in mid-2008. A third federal UI trust fund, the Federal Unemployment Account (FUA), is available to make loans to states whose accounts at the Treasury have been exhausted. At the end of December 2008, FUA loans were outstanding for three states (Indiana, Michigan, and South Carolina), but four other states also borrowed during January 2009 (California, Kentucky, Now York and Ohio). …

Each of the three federal UI trust funds has a statutory ceiling, and when any one reaches its ceiling there are rules that direct excess revenues into the other accounts. When all three trust funds are at their respective ceiling, any excess is to be returned to the states as deposits into their state UI accounts at the Treasury. In the past, federal legislation has disbursed monies to the states when the trust funds were below these ceilings. Most recently, $8.0 billion was disbursed to the states in March 2002. These so-called Reed Act monies were allocated to the states proportionately according to their UI taxable wages. There are proposals for a similar distribution in 2009.5 At the end of 2008, the combined balances in the three federal UI trust funds totaled $31.3 billion.”

Initial claims graphed against the endpoints of recessions

9 Apr 2009. Econbrowser.

http://www.econbrowser.com/archives/2009/04/another_green_s.html

“Initial unemployment claims and the end of recessions. James Hamilton”

“The graph below plots 4-week averages of the initial unemployment claims going back to 1967, with vertical lines drawn at the first week of the month in which the NBER eventually declared that a recovery from the recession began.”

[To see the chart, follow the above link to the original post.]

Graph of initial and continued claims show they run in parallel

9 Jul 2009. Calculated Risk.

http://www.calculatedriskblog.com/2009/07/weekly-unemployment-claims-decline.html

“Weekly Unemployment Claims Decline, Record Continuing Claims. by CalculatedRisk”

“This graph shows weekly claims and continued claims since 1971.”

[To see the chart follow the above link to the original post.]

State of the unemployment system

23 Jul 2009. NYTimes.com.

http://www.nytimes.com/2009/07/24/us/24unemploy.html?_r=1&partner=rss&emc=rss

“Jobless Checks for Millions Delayed as States Struggle. By JASON DePARLE”

[The average state payroll tax has dropped steadily from 1.09% in the 60s to 0.66% since 2000. As of June, 16 states had had to borrow from the US Treasury to meet obligations.]

8 Sep 2009. FRBSF Economics Letter.

http://www.frbsf.org/publications/economics/letter/2009/el2009-28.html

“New Highs in Unemployment Insurance Claims. By Aisling Cleary, Joyce Kwok, and Rob Valletta”

“The tax rate for each employer depends on the past frequency of UI claims filed by its former employees (“experience rating”). … UI's role as an automatic stabilizer in the face of severe economic downturns is reinforced by the availability of an additional 13 weeks of extended benefits for UI recipients in states where the unemployment rate exceeds a state-set trigger level. Additional federal extensions are periodically enacted during times of high unemployment when benefits are exhausted at a high rate. Such extensions were approved twice in 2008 and again in February 2009.

The program was originally made available to employees of private businesses employing eight or more workers. Coverage has expanded greatly since the 1950s. In 2006, 96.4% of civilian wage and salary workers were covered by the unemployment insurance system (U.S. House of Representatives 2008). In addition to the requirements that workers not be unemployed through their own choice and, in most states, that they be available for full-time work, eligible claimants must have met a base earnings requirement in their prior jobs over a preceding four-quarter period. These vary widely by state, ranging from $130 in Hawaii to $4,291 in North Carolina in 2008 (U.S. House of Representatives 2008). The amount and duration of weekly benefits also vary by state and are generally limited to a fixed fraction of the claimant's prior wage, up to a maximum level. The average weekly benefit in 2007 was $288, replacing slightly over a third of the average weekly wage in the United States. …

This secular decline in UI claims during the early 1980s is closely related to the decline in the take-up rate, defined as the percentage of UI-eligible individuals who claim and receive UI payments. Blank and Card (1991) found that most of the take-up rate decline was attributable to falling unionization and unemployment shifts toward states with lower UI take-up rates. Lower rates of unionization affect UI take-up because unions provide resources that ease filing procedures for members. The variation in take-up rates across states is less easily explained, but probably reflects cross-state differences in cultural norms regarding participation in public programs. The analysis of Anderson and Meyer (1997) indicates that the further decline in UI recipiency that is not explained by union and state effects is largely attributable to increasing taxation of UI benefits between 1979 and 1987, which reduced the net after-tax value of benefits and thereby decreased filing incentives. …

The resulting increase in the share of job losers in the unemployment pool can be seen in Figure 3, which depicts the share of this group among newly unemployed individuals since 1976. At the start of the period, job losers constituted about 40% of the newly unemployed on average. Since then, the underlying trend has been upward, reaching a recent high of 65%. The resulting increase in the share of job losers in overall unemployment directly increased UI recipiency among the unemployed by increasing the percentage of workers who are eligible for benefits.”

Another perspective on initial claims

21 Sep 2009. Bonddad blog.

http://bonddad.blogspot.com/2009/09/getting-it-wrong-about-initial-jobless.html

“Getting it wrong about Initial Jobless Claims and Nonfarm Payrolls. by New Deal democrat”

“Some time ago, Prof. Brad DeLong of Berkeley, thinking aloud with graph, drew a line across the 1991 and 2001 recessions and recoveries, making a “note to self” that it appeared that Initial Jobless Claims post those recessions had to decline to 400,000 or less before payroll jobs were added. Thus, mused Prof. DeLong, it must be so as well, post this “Great Recession.” This “note to self” was subsequently repeated by Bill McBride at Calculated Risk, from which it has now been picked up and repeated at Prof. James Hamilton's site, Econbrowser. It is well on its way to becoming Holy Writ.

Let me say first of all that I have the highest respect for all 3 of the above gentlemen. Nevertheless…

IT IS WRONG.

The 1991 and 2001 recessions were very mild. Peak initial jobless claims in those recessions were 501,250 and 489,250, respectively. It would be nuts to think that jobs would be added to the economy anywhere near the 500,000 high water mark in jobless claims from those recessions.

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.”

[and http://bonddad.blogspot.com/2010/04/new-deal-democrat-1-econoblogosphere-0.html]

Rules for UI trust fund interest free loans will be tightened up

17 Sep 2010. DOL.

http://webapps.dol.gov/FederalRegister/HtmlDisplay.aspx?DocId=24246&AgencyId=15&DocumentType=2

“Federal-State Unemployment Compensation Program; Funding Goals for Interest-Free Advances; Final Rule [9/17/2010] ”