Despite the large decline since last summer, initial claims for unemployment insurance still remain higher than we would have thought given the general improvement in economic conditions.
A recent report from the San Francisco Federal Reserve Bank provides an interesting explanation why claims have not fallen more (link here). In turn, this suggests claims might not need to fall very much more from current levels in order for non-farm payrolls to meet our bullish expectation of an average increase of 225,000 per month in 2011.
As the chart above shows, initial claims remain above where they were prior to the recession. However, data on layoffs and discharges from JOLTS (the Labor Department's Job Opening and Labor Turnover Survey) show that layoffs/discharges are now back to pre-recession levels.
The reason for the discrepancy, the Fed study says, is that claims are "exaggerating" layoffs. Because those who lose their jobs are staying unemployed for longer than usual, they are also applying for benefits more aggressively than usual. Adjusting for a higher "take-up" rate for benefits, claims would be much lower and more consistent with a higher pace of job creation.
If we can find any fault with the study from the San Francisco Fed, it's that it attributed the increase in the take-up rate to the longer duration of unemployment. However, another obvious explanation is that workers are going to be more aggressive about applying for benefits when they might last up to 99 weeks rather than when they can last up to the traditional 26 weeks.
The bottom line is that although claims should continue to move lower, the US economy can experience an acceleration in job creation even if they do not move significantly lower.
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Posted on Wednesday, February 9, 2011 @ 2:44 PM
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