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January 2, 2011

Editorial: Beware of Falling Continuing Jobless Claims

As you can see from the above chart, over the past several weeks, continuing jobless claims have plunged over the past couple of months. Some economists (and liberal politicians) may point to this and say that the jobs picture (or the economy) is improving. However, a deeper look into the unemployment situation may shine a different light on why this number is dropping.

As Milton Friedman would say, you should always be aware of statistics. I agree, but in a situation like this (in fact with economics in general), we should examine complimentary statistics. In this situation, we see that weekly jobless claims (new claims) have fallen, but not by as much as continuing claims. Also, the total number of unemployed, the headline unemployment rate (9.8%) and the U-6 rate (17%) have shown almost no improvement.

So what is causing this profound drop? I believe the unemployment compensation process sheds some light on the situation.

Despite recent legislation, unemployment compensation for those unemployed for more than 99 weeks has been discontinued. Who is this group? This would include the people who became unemployed in the three months from the beginning of the recession (September to December 2008) and have yet to find work. With unemployment benefits exhausted, why bother filing a claim?

Therefore, the drop in continuing claims does not accurately reflect the drop in unemployment, but in fact an increase in the number of people falling off the workforce grid.

Some would argue that emergency benefits are still available to people over 99 weeks, therefore the incentive to file is still there. While this may be true, we (for one) aren't certain that information is included or represented correctly in the statistic. Keep in mind that the continuing jobless claim statistic has undergone several calculation revisions since the recession started.

Additionally, those earning more than the emergency benefit amount and less than the original benefit amount through part-time labor, are not incentivized to file. Are these people, earning $200 per week, a sign of an improved economy? They aren't and the continuing jobless claims and the headline unemployment rate fail to capture this statistic.

We will continue to monitor the continuing jobless claims statistic and we aren't going to totally reject it. As stated earlier, we must examine all unemployment statistics jointly to paint the picture of the health of our labor market.

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