Initial unemployment claims surprised to the upside today, hitting the 500K mark on a seasonally adjusted basis for the first time since November 2009. The non-seasonally adjusted number was more benign at 401K, but for the year to date, actual claims are coming in at an average of about 5,000 over seasonally adjusted figures. The only dovish thing we can discern in the data is that the trend in actual unadjusted figures isn’t as bad as for the adjusted ones, which might be an artifact of the latter playing catch up to the former. But the unadjusted claims data don’t show a discernible trend, which implies (1) continuing uncertainty, and (2) a level that is still too high for comfort economically, socially, and politically.
What really caught our eye once again was the ratio of continuing to initial claims, which we charted here recently. Loosely speaking, this can be thought of as the pool of unemployed to newly unemployed — though keep in mind that unemployment benefits run out at some point, so the continuing unemployed in this chart only include those who are still able to collect benefits. If the ratio trends upwards, it means that an increasing number of people are unable to find work. Noticing the upward trend break that appears around 2000, we wrote:
Through the end of the last century, the median number of continuing claimants has been just under seven. Since the turn of this century, it has been nearly eight, and at the moment it is just shy of eleven. That means that for every individual filing a new claim for unemployment benefits, there are more than ten others filing ongoing claims. On that count, the current period looks notably worse than the 1970s. However, it does require some additional analysis — specifically, has extending the duration of benefits skewed the number of continuing claims upward?
We took the opportunity with today’s release to incorporate that data, using figures that Michael Feroli of JP Morgan Chase compiled for a piece back in March on emergency benefits extensions. As he noted, ”In every recession since 1970 (except the short, one-quarter recession in 1980), Congress has authorized emergency benefits of one form or another, though the terms have varied significantly.”
Feroli outlined a case for unemployment benefits raising the unemployment rate by 30% (or +1.5% assuming a long term rate of 5%). To do so, he started with an econometric estimate from a 2006 study that each week of extended benefits prolonged unemployment by 0.2 weeks. His inferences were widely cited by pundits and other commentators at the time, and still are.
We’ve updated our earlier chart with bars showing periods during which emergency unemployment benefits were enacted. The black line is a ratio of the one year moving average of non-seasonally adjusted continuing claims to non-seasonally adjusted initial claims (the blue line is a three year moving average of that ratio).
While this does not constitute a statistical analysis, there are some interesting things to note. First, the graph appears to lend support to Feroli’s 30% estimate; from a long term average of around seven, the long term ratio is fast approaching nine, or 130%, of the earlier rate. However:
- During periods where emergency unemployment benefits were enacted by Congress, the ratio of continuing to initial claimants has decreased fairly sharply. This does not support the new “funemployment” meme (reminiscent of the “welfare queen” meme of the 1990s) being floated by opponents of extending emergency unemployment benefits.
- The ratio has made successively higher lows and higher highs since the 1991 recession. Throughout the second half of the 1990s — notably during the Clinton-GOP boom (or Dole-Gingrich or Clinton-Rubin or whatever else you might prefer to call it) — the ratio never returned to its long term lows of the 1970s and 1980s, even though emergency benefits were not in effect.
- The same is true for the period following the 2001 recession. The ratio remained stubbornly high, even though emergency benefits had expired (and like other periods, it had dropped notably while emergency benefits were in effect).
- The duration of emergency benefits in the 2002-2004 period were in line with earlier periods, so it’s hard to argue that more generous emergency benefits in the last two recessions have somehow led to longer spells of unemployment.
These observations make us highly doubtful of Feroli’s inferences. There’s obviously a chicken and egg problem at work in the data. For example, does an additional week’s worth of benefits extend unemployment by 0.2 weeks? Or does causation run the other way, i.e., do stubborn periods of unemployment cause Congress to extend emergency benefits by a commensurate and longer period of time? And given that policymakers don’t typically enact measures for a week at a time, the literature’s 5:1 rule of thumb could be far more benign than moral hazard implies — couldn’t it?
Judging by the Nicholson-Needels paper that Feroli used as his starting point, a great deal of energy has been focused on the issue of (and assumptions around) moral hazard, and far less on the direction(s) of causation. Until researchers can show plausibly that moral hazard is being exploited by a significant proportion of recipients, we think the focus on (dis)incentive effects is misplaced. To us, the far more important consideration is that there appear to be some serious structural issues at work in U.S. labor market dynamics.
If that’s true, then unfortunately, the trend marked in our chart may very well be sustained, with all the negative social and economic effects that implies. And these kinds of issues must be addressed when people start hyperventilating about public sector deficits. For example, if aggregate demand is going to run short of potential output for an extended period of time due to overlooked structural factors, then fiscal austerity can be thought of as a direct tax on future generations.
Those who ignore this fact but still harp on the alleged immorality of ‘saddling future generations with debt’ are turning substantive economic issues with major long term social implications into a morality play for simpletons, as well as grossly misunderstanding how our monetary system functions. It needs to stop.
Of course these folks come in all political flavors, from the “starve the beast” crowd to the “soak the rich” gang. And if you believe, rationally, that politicians are likely to eventually try to close deficits and pay down debt at the economy’s expense via higher taxes, then starving the beast is an understandable objective, despite its likely costs.
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