A recent article from the Federal Reserve Bank of St. Louis explains why reports about initial unemployment insurance (UI) claims should be interpreted with caution. In an Economic Synopses essay, economist David Wiczer noted that a spate of good economic news had been filtering through the media in recent weeks:
Wiczer pointed out that another piece of data being touted—initial unemployment insurance claims being at an 8½-year low—needs further explanation, as it is not unequivocally good news. He wrote, “The steady decline in initial UI claims also reflects larger macroeconomic trends of fewer job separations and fewer hires.” In his essay, he examined three reasons new UI claims are problematic indicators of the state of the labor market.
Initial UI claims as a fraction of the labor force is lower now than in the 1980s and most of the 1990s. Wiczer noted, “It is certainly not because the labor market is doing much better than anytime during those two decades.” He wrote that several trends could be responsible for this change, such as eligibility requirements for receiving UI benefits, the number of separations in the economy and even the gender mix among the new separations (as men claim UI benefits less often).
Increases in unemployment can result from more workers separating from their jobs and entering unemployment or from currently unemployed workers finding jobs at a lower rate. Wiczer cited papers showing that approximately 75 percent to 80 percent of changes in unemployment rates are due to changing job-finding rates, rather than separations rates. He wrote, “As a proxy for separations, initial UI claims is inherently a weak predictor of changes in unemployment.”
During the Great Recession, the rate of separations fell along with the rate of hires, so there were fewer people to initiate UI claims. Wiczer noted that despite the intuition that fewer job separations indicate a healthy labor market, a low level of separations also corresponds to a low level of hires. He wrote, “In fact, the rates of worker separations and hires slowed drastically during the Great Recession and are still about 10 percent lower than their prerecession levels, even though unemployment has recovered more quickly.”