Good news from the US Department of Labor Thursday morning as initial claims for unemployment insurance fell sharply last week:
In the week ending Feb. 5, the advance figure for seasonally adjusted initial claims was 383,000, a decrease of 36,000 from the previous week’s revised figure of 419,000. The 4-week moving average was 415,500, a decrease of 16,000 from the previous week’s revised average of 431,500.
Only occasionally do we write about the initial claims number, mostly because it’s a volatile statistic from week to week and is often later revised — which is also why we prefer to focus on the four-week-moving average when we do write about it.
But that’s not to say the statistic is meaningless. As you can see from the below graph, it often functions as a leading indicator of where US employment is headed.
Via Mark Thoma:
And on Tuesday, the San Francisco Fed published a short essay explaining something interesting about the initial claims data. First, here’s how it’s calculated:
The number of initial claims equals the number of layoffs times the fraction of laid-off workers eligible for unemployment insurance [UI], known as the eligibility rate, times the fraction of these UI-eligible workers who file initial claims, known as the take-up rate. If the eligibility rate and the take-up rate do not change, then the initial claims number moves in direct proportion to layoffs. In this way, initial UI claims can be a good indicator of the extent of layoffs in the economy.
Obvious enough, it would seem. But as you might have guessed, the eligibility and take-up rates do change over time, and this can complicate the claims figure.
In a recession, it is common for the jobless to be more dependent on unemployment insurance than during an expansion, so a higher percentage of them are likely to apply for it — and you would expect the reverse in a recovery.
If this is indeed the case, it would mean that the UI numbers were, believe it or not, overstating the severity of unemployment during the recession and its immediate aftermath, according to the authors. But it also means that the downward trend in the numbers since the middle of last year could be the partial result of a decline in the take-up rate, overstating the improvement in labour markets.
In order to find the change in the percentage of jobless people who apply for UI, the authors first have to adjust for the increase in the number of people eligible for it. Once they’ve done that, the authors then calculate what initial claims would have been had the take-up rate stayed constant at its average from December 2001 to June 2010.
And it turns out that the logic is supported by the data:
Our analysis suggests that the level of initial claims in 2010 reflected not only the level of layoffs, but also the increased reliance of laid-off workers on the UI system, as measured by our calculation of a rising UI take-up rate. This increase in the take-up rate reflects both the extension of UI benefits and an increased fraction of laid-off workers filing initial claims because their prospects of finding jobs were dim. Of course, these two factors are not easy to separate.
These findings imply that, as long as the UI take-up rate remains high, initial claims readings will tend to stay high, even if layoffs fall to pre-recession levels. Moreover, recent declines in initial claims do not necessarily indicate a reduction in layoffs. Decreasing claims may also capture a decline in the take-up rate. We expect the take-up rate to decline even more when both UI policy on length of benefits and duration of unemployment return to more normal levels.
Related link:
Payrolls snowed under, but unemployment rate drops again – FT Aphaville