Do Initial Claims tell if Unemployment is really at 5.5%?
The unemployment rate is officially at 5.5% in the US. But is that rate true? Maybe the rate should actually be higher when one considers the low labor participation rate and the long-term unemployed.
Civilian Labor Force
The civilian labor force has not risen much since the crisis. (link)
Do we conclude therefore that there are many unemployed out there beyond the 5.5% unemployment rate?
4-week Average of Initial Claims
Initial claims of workers seeking state jobless benefits has declined to a level near the ends of past business cycles. (link)
A higher level of initial claims shows a weaker economy. Can we expect initial claims to fall more if we expect the economy to get even stronger from here into the future?
Initial Claims / Civilian Labor Force
How can we get a sense if the labor market is reaching a saturation point that would show that unemployment is near its natural potential?
The 4-week moving average of initial claims can be divided by the civilian labor force. (link)
In this graph, since the crisis, initial claims have declined in relation to the civilian labor force employed. The economy has been recovering. Since last October, though, the initial claims have been rising slowly in relation to the civilian labor force.
The graph would imply that maybe unemployment has reached a saturation point consistent with past business cycles. Or can the line continue downward? Could we expect the civilian labor force to continue rising with initial claims to continue falling?
If you see the saturation point taking effect now, then you might conclude that a 5.5% unemployment rate is fairly reliable and that unemployment is getting close to its natural potential..
However, if you see the saturation point going even lower with fewer initial claims per civilian worker, then you might conclude that a 5.5% unemployment rate is too low to reflect normal labor market conditions and that unemployment is not yet near its natural potential.
Update: The unemployment rate is here plotted against the last graph above. The unemployment rate will begin to bottom out when the line for 4-week moving average of initial claims divided by civilian labor force reaches its saturation point. But where is that saturation point?
the other side of the story is that the hiring rate has been below historical peaks, so we’ve devolved into a low labor turnover situation…
i think this is as good as it gets this time around…we’ll either see a shallow recession or, as witmessed by Q1 GDP, almost no growth this year, and unemployment will likely rise…we should come out of it though, with a long boom, almost like the 50s…
Q1 was a weather created phenom. It looked like GDP was going to grow 2% then came a freak late winter arctic outbreak February 12th and every thing slowed down to 1%. The economy still grew.
John, i look at GDP closely and dont see much weather impact…at the most, PCE could have been down a half percent on cold in the east…the flipside of that is that increased household utility consumption added .59 percentage points to GDP…the big hit in GDP came from contraction in investment spending…real investment in non-residential structures fell at a 23.1% rate; mostly due to a near 50% pullback in the number of drilling rigs in use in the quarter; by itself, that took .75 percentage points off the change in GDP
Rjs,
I am glad that you said it… I agree… “devolved into a low labor turnover situation…”
Maybe we are seeing the dynamics of a slave state working their way into the labor market. Higher unemployment in the face of lower turnover looks like people who enter the job market get stuck while more do not even want to enter such a market.
As to this year my seat of the pants assessment being an owner of a flower shop, friends in the auto repair business and funeral home and deli/catering is that the weather only added to what started the moment the calendar turned to 2015.
My shop was off 14% for the month. Unheard of for January. The weather did not start until the last week of the month.
Non of us have recovered. Frankly people have run out of money. At least around here it seems.
I think it is questionable whether the U-3 (5.5%) has any validity whatsoever anymore as an actual measure of unemployment. The U-3 uses an arbitrary cut-off that excludes many people who want jobs from the definition of the labor force. The U-6 includes people who say they are ready to take jobs if they were available and who made some efforts to find one within the past year. That relying on the expressed word of people being surveyed as the U-6 does is superior to the artificially reduced definition of the labor force in the U-3 is supported by employment-to-population ratio changes over the years, which show that when jobs are available people who have not been considered part of the labor force come out of the woodwork and take those jobs.
The U-6 today is at 11%, twice the official U-3 unemployment rate. That is about 60% higher than it was in 2000 (around and even below 7.0%), which is the last time we had something that actually felt like full employment. That sure looks like a far cry from “full employment.” I think most people actually experiencing the labor market would consider the idea that we are close to full employment silly and kind of cruel.
Urban Legend,
Your points are acknowledged. You may be right. But let me just ask a question…
Even though there are lots of underemployed and unemployed in relation to past business cycles, do you really think the economy can employ them back to a full employment?
I see the cup of the economy as smaller now. Therefore the dynamics of full employment can be experienced at higher levels of underemployment and unemployment. How do you respond?
sorry folks, your trying to hard. fwiw, the U-6 are people that are UNDERemployed and that will probably be back under 10% by years end.
PCE was 5% in the 4th quarter, looks like 5% in the 2nd quarter. Your missing it
John C,
What are your thoughts about this graph?
http://research.stlouisfed.org/fred2/graph/?g=1aln
Edward —
The U-6 was higher in its first year at BLS (11.5% in Q1 1994) than it is now, but it came down a lot just a few years later (7.0% in Q1 2000). Those people who may have been judged unemployable became employed when jobs became available, so especially since the potential work force is better educated overall now than it was then, I see no reason why that could not happen again if demand for labor increases.
The $64 question, of course, is how to get that demand for labor up. We can’t expect another bubble to do it yet again, and the private sector seems stuck. Forcing higher wages and incomes for the mass of Americans who would spend it would help — in the short term, only significant minimum wage increases would seem to help there — but more permanently, a national decision to fix and modernize the country’s infrastructure and restore the level of spending on that we used to have looks like the only way in the absence of bubbles to increase demand for labor permanently. Of course, real full employment also drives up wages (in the absence of collusion), so that is a double-whammy effect on demand.
There’s a lot of chicken-and-egg here, and it seems like the earlier national decision to hate government and stop fixing and modernizing our infrastructure caused a couple million good jobs performing valuable work for the country not to be created every year since.
I’m not sure what you mean when you refer to the “dynamics of full employment.” If inflation is one of those, in a time when labor is weakened (and will remain so for many years) that seems extremely remote.
John — 11% U-6 unemployment plus under-employment represents roughly 28 million people. The “under-employed” — specifically, those working part-time for economic reasons — are less than one-fourth of that amount. And under 10% is still pretty bad, unless it’s way under 10%. I would guess that it will never “feel” like full employment to Americans generally until the U-6 is well under 8%.