Labor Market Progress Is Anything But Dramatic; Here’s Why

Source: Thinkstock

Source: Thinkstock

Last week, Americans filed the fewest number of first-time applications for unemployment benefits in seven years, meaning the last time jobless claims — and by association, emerging unemployment — fell so low was before the financial crisis and subsequent recession. To any casual observer of the United States labor market, hitting such a historic milepost would suggest the recovery of the economy and the jobs market is well on its way to completion. And it is true that the strides forward the labor market has taken, especially in the past twelve months, cannot be discounted. Yet, as the most recent figures released by the Department of Labor prove, progress is steady but not without setbacks. Or as Pierpont Securities economist Stephen Stanley told Bloomberg, “the labor market is showing slight progress, but nothing dramatic.”

The Labor Department reported Thursday that initial jobless claims rose by 28,000 applications to a seasonally adjusted 326,000 in the week ended May 17. While economists were expecting claims to rise slightly, this increase was greater than expected. However, even at this elevated level, claims figures are still trending near pre-recession lows, when the average churn of the job market created approximately 300,000 weekly applications for unemployment benefits. Jobless claims provide the first look at the employment situation for any given month, but since the weekly figures can be volatile, economists use the four-week moving average to understand wider trends in employment, which are far more telling of labor market health than weekly readings. Even though claims ticked up over the past week, the the four-week moving average continued to decline, dropping by 1,000 to 322,500 claims. This is the second consecutive drop for the moving average, yet that measure remains above its recent low of 302,000 claims.

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It is also important to remember that the jobless claims measure calculated by the Labor Department’s Bureau of Labor Statistics is what is known as a low impact indicator compared with its monthly Employment Situation Report. While the general downward trend in jobless claims can be termed as a positive sign for the labor market, jobless claims numbers are a leading economic indicator, and therefore only offer indirect clues about the pace of hiring — the most important part of the labor market story. While “inroads” into unemployment are being made, progress is still slow. In other words, job growth may no longer be bad, but it is still sluggish. And, importantly, economists say any claims figure below 350,000 indicates moderate job creation.

Plus, the number of people continuing to collect benefits decreased by 13,000 to 2.65 million in the week ended May 10, a decline that puts continuing claims in line with 2007 levels.

If initial claims for unemployment benefits — which serve as a proxy for layoffs — defined the whole labor market story than the narrative of the jobs recovery would be easy to summarize: Progress is steady, or at least, the labor market situation is not worsening. As jobless claims continue to decrease, it is expected that the labor market will further tighten, meaning employers will theoretically be under more pressure to boost wages. And typically, initial jobless claims wane before employment growth can accelerate. Of course, initial applications for unemployment benefits have been trending down for more than a year, but job gains have been far less consistent.

While the labor market is indeed resilient, it is no where near full, pre-recession health. Payrolls did indeed increase in April, but generally companies are holding off on hiring until consumer spending substantially increases. And the problem is that stagnant wage growth has made it difficult for consumers to generate sustained periods of very strong spending. Faster growth in job creation and wages would jump-start economic growth as household spending accounts for approximately 70 percent of U.S. gross domestic product, which grew an anemic 0.1 percent in the first quarter of this year.

With the unemployment level now resting at 6.3 percent, it is clear the labor market has taken a great leap forward in the past year. But as numerous economists have argued, that headline figure tells far less than the whole labor market recovery story. While job creation did strengthen in April, with employers adding 288,000 jobs to payrolls, a significant portion of the 0.4 percentage-point drop in the jobless rate was due to came from a sizable decrease in the labor force, meaning workers are still discouraged and unable to find employment. And that aspect of the jobs report was by no means surprising; a disheartened labor force and a record low labor force participation rate has characterized the recovery and is evidence that recovery has not yet reached all Americans.

Because unemployment remains such a pressing issue, jobless claim numbers continue to important data for assessing the ongoing labor market recovery.

Thursday’s jobless claims data is especially noteworthy because the week ended May 17 is what is known as the survey week. The Labor Department relies, in part, on a mid-month survey of households to tabulate the number of workers receiving pay for the week in question. If a snowstorm or other issue occurs during that week, the overall results can be disproportionately impacted. Data is sourced from two separate inquiries; in addition to the survey of households, which determines the unemployment rate, the Labor Department also questions public-sector employers and private companies to calculate how many jobs the economy created. Because of the different way unemployment and job creation is counted, often, a conflicting narrative is created. For this month, given that jobless claims rose in the survey week, the data could point to a weaker pace of job creation.

But, of course, job creation in April was exceptionally strong, with payrolls expanding the most since early 2012.

And that pace posed a marked contrast from March. That month, employers advertised far fewer jobs than in March, according to the Labor Department’s Job Openings and and Labor Turnover Summary, or JOLTS report. The data, released on May 9, indicates that last month’s hiring surge will likely give way to more moderate payroll growth.  “The labor market is improving, though it’s improving a lot less quickly than any of us would like,” George Washington University associate economics professor Tara Sinclair told Bloomberg Businessweek. “We’re all still hoping there will be these big jumps, but at this point, most people are still talking about a slow crawl back.”

In March, the number of positions waiting to be filled decreased by 111,000 to 4.01 million. And that decline in job advertisements, a measure of labor demand, indicates that employment will grow at a more sustainable pace in coming months, giving Federal Reserve policy makers more reason to continue tapering its monthly economic stimulus and to keep interest rates low. By comparison, the number of job openings recorded in February was just below the nearly six-year high reached in November. The number of workers hired in March also eased, falling to 4.63 million from February’s five-month high of 4.7 million in February. But at 1.57 million, the number of workers dismissed from their jobs in March were the fewest since November. Meanwhile, the number of quits remained relatively unchanged at 2.48 million. With both job openings and dismissals falling, the ratio between the unemployment level and available job openings has narrowed; there were 2.6 unemployed people were vying for every opening in March. In a healthy economy, that ratio is typically 2 to 1.  It was 1.8 when the recession began in December 2007, and at the end of the recession in June 2009, there were 6.2 unemployed persons for every job opening.

The JOLTS report is a favorite of Federal Reserve Chair Janet Yellen because it describes “the underlying dynamics of the labor market” and provides context for monthly payroll data by tracking resignations, help-wanted advertisements, and hiring. To Yellen, the data serves as a measure of the tightness of the labor market and of worker confidence. Labor market tightens refers to the gap between the amount of labor need by employers and the amount of labor available.

“While conditions in the labor market have improved appreciably, they are still far from satisfactory,” the Fed Chair said in her congressional testimony before the Joint Economic Committee earlier this month. “In light of the considerable degree of slack that remains in labor markets and the continuation of inflation below the Committee’s 2 percent objective, a high degree of monetary accommodation remains warranted.” She also touched on the lingering high levels of long-term unemployment. In April, 3.5 million Americans had been without a job for twenty-seven weeks or more, accounting for 35.3 percent of the total unemployed population. “We’ve never really seen a situation where long-term unemployment is so large a fraction of total unemployment,” Yellen told lawmakers. “But I have very little doubt that if growth in the economy picks up and continues at an above-trend pace, that long-term unemployment will come down, too.”

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