Labor Market Steps Forward: Wages Grow and Jobless Claims Drop

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Initial applications for unemployment benefits are trending near pre-recession lows. In the week ended April 5, Department of Labor data show jobless claims fell close to a seven-year low of 300,000; the last time initial claims were that low was on May 12, 2007, before the Great Recession, when the figure measured 297,000. Even though jobless claims rebounded slightly this past week, they are still in line with pre-recession levels, when an average number of 320,000 initial claims were filed each week due to the normal churn in the job market.

In the week ended April 12, 304,000 Americans filed initial claims for unemployment benefits — an increase of 2,000 from the prior period’s upwardly revised 302,000 new claims. Even though claims increased, the rise was smaller than the jump to 315,00 new claims expected by analysts. Claims numbers still confirm that employers are holding onto workers as expectations for greater economic growth become stronger. Current jobless claims numbers are “collaborating with the other signals we have been seeing, which is the jobs market is slowly improving,” Moody’s Analytics senior economist Ryan Sweet told Reuters. “Some of the drop is normalizing from this winter’s depressive effect.”

More significantly, economists say any claims figure below 350,000 indicates moderate job creation. Initial claims for unemployment benefits — which serve as a proxy for layoffs — paint a picture of a strengthening and resilient labor market. If initial claims for unemployment benefits defined the whole labor market story, then the narrative of the jobs recovery would be easy to summarize: Progress is steady, or at least, the labor market situation is not worsening. Confirming the thesis of labor market resilience is the fact that the underlying trends in jobless claims remained positive.

But while the downtick in jobless claims can be called a positive sign for the labor market, it is important to remember that jobless claims numbers are a leading economic indicator, and therefore only offer indirect clues about the pace of hiring — the other piece 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.

Further confirming that jobless claims numbers are continuing their downward — if occasionally volatile — path was the decline in the monthly average. 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. Falling 4,750 from the previous week’s upwardly revised 316,750, the four-week moving average for the week ended April 12 dipped to 312,000. This is the lowest level recorded since October 6, 2007, when the four-week moving average hit 302,000 claims.

“The labor market is getting better,” Societe Generale senior U.S. economist Brian Jones told Bloomberg. “You’re going to see it improve further as we go through the balance of the year.”

In addition, in the week ended April 5, the number of people continuing to receive jobless benefits for more than one week fell to the lowest level recorded since December 2007. Continuing claims, which are reported with a one week lag, dropped 11,000 to 2.74 million from the 2.78 million applications filed in the previous period. “The ongoing improvement in continuing claims remains encouraging amid more positive labor market dynamics, suggesting that workers are not simply leaving the labor force but likely finding gainful employment,”  TD Securities economist Gennadiy Goldberg told Reuters.

Other economists — like Moody’s Analytics chief economist Mark Zandi — cite ”spot labor shortages” as evidence that employment numbers will begin to improve this year. Throughout the nearly five years that have passed since the recovery officially began, one particular hallmark of the economy’s ongoing weakness has been sluggish wage growth. But now, economists have growing evidence that the labor market is tightening enough to allow workers to finally get real wage increases that significantly outpace inflation.

U.S. employers added 200,000 jobs to payrolls last month, and at that pace, Zandi argues the job market is slowly but steadily tightening. Further evidence of that tightening is the fact that the short-term unemployment rate, which excludes those out of work more than six months, has fallen to 4.6 percent.

“This isn’t far from the rate that has prevailed historically in good job markets,” the economist wrote in a March 14 labor market assessment. “Long-term unemployment remains a serious problem and is the principal reason overall unemployment remains high” at 6.7 percent. The reason short-term unemployment is dropping and the number of longer-term unemployed Americans remains constant is because new jobs created go to those whose job skills are more relevant.

“Those idle longer than six months have a difficult time obtaining jobs, despite a growing number of openings, because skills and marketability have eroded,” Zandi said. That reality leaves the long-term unemployed in a bubble and allows economists to describe the labor market as tight because employers see a limited number of desirable candidates for the jobs that are available. The perceived lack of workers is only exacerbated by the fact that the large number of Americans who have been jobless for longer than six months have dropped out of the labor force. Only 63.2 percent of Americans 16 or older are participating in the labor force, a level unseen since the late 1970s.

The Labor Department’s February Jobs Openings and Labor Turnover Survey confirms that. The so-called JOLTS report revealed that employers posted the largest number of job openings in February since January 2008. Job openings, a measure of labor demand, increased 299,000, or 7.7 percent, to a seasonally adjusted 4.17 million. The JOLTS report is a favorite of Federal Reserve Chair Janet Yellen because it describes “the underlying dynamics of the labor market.”

Even so, many economists worry that the current unemployment rate in the United States — which has ticked down from a recession high of 10 percent to 6.7 percent in recent months — hides a great number of the labor market’s problems. In a March 31 speech at a Chicago conference, Yellen explained that she believes the high number of underemployed Americans, the meager increases to wages, the extraordinarily large share of the unemployed who have been out of work for six months or more, and the record low levels of labor force participation suggest “there is still considerable slack in the labor market.”

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