Having hit new 42-year lows last week, initial jobless claims once again beat expectations but rose very modestly from a revised 256k to 259k this week. This continues to diverge drastically from Challenger job cuts data, from weakening payrolls data, and from collapsing ISM survey employment indicators... so who is lying?
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Although payroll employment growth has slowed in recent months, initial claims for unemployment insurance benefits remain very low. The four-week moving average of initial claims has trended lower again this year—despite meaningful layoffs in energy-producing states—and is currently at the lowest level since early 2000 (Exhibit 1). Does this mean that the current rate of nonfarm payroll growth understates the strength of the labor market?
Not necessarily. As we have noted in prior research, the structural relationship between jobless claims and employment growth changes over the business cycle. Unemployment insurance claims are an observable proxy for one type of labor market flow: the number of persons laid-off each month. However, employment growth is a function of other flows as well—specifically, the number of persons hired, the number who quit voluntarily, and those who separate from employment for other reasons. These other types of labor market flows—other components of Fed Chair Yellen’s labor market “dashboard”—can affect the relationship between layoffs and employment growth over time.
Moreover, initial jobless claims are an imperfect measure of layoffs because the propensity to file a claim—often called the “filing rate” or the “take up rate”—also changes over time. During the financial crisis, for example, the benefit take up rate increased significantly. Exhibit 2 shows the level of jobless claims alongside the measure of total layoffs from the Job Openings and Labor Turnover Survey (JOLTS) (claims here are expressed as a monthly rate by multiplying the average weekly rate by the number of weeks per months). Before 2007, approximately 70-80% of layoffs resulted in an unemployment insurance benefit filing. During the recession, claims increased more rapidly than reported layoffs, implying an increase in the claims filing rate. In the years since, claims have fallen much faster than layoffs, implying a decline in the benefit take up rate.
Charts: Bloomberg
