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Jobless Claims Fall To 42 Year Low - Fed Likely To Raise Rates Soon

Jobless claims in the United States, the number of people making an initial claim for unemployment insurance benefits, have fallen to a 42-year low. This indicates that were in a strong jobs market as employers are reluctant to lay off labo

Jobless claims in the United States, the number of people making an initial claim for unemployment insurance benefits, have fallen to a 42-year low. This indicates that we’re in a strong jobs market as employers are reluctant to lay off labor given the difficulties of finding labor when it is needed. This makes many think that the Federal Reserve is going to be raising interest rates soon enough. For these signs of a strong jobs market are just what we want to see wages rising strongly.

It’s worth noting something important about these numbers. They’re reported simply as the gross number. But the population was very much smaller 42 years ago and so was the size of the workforce. So in reality jobless claims are very much lower than they were back then as a percentage of the workforce, which is the way we really ought to be looking at things:

Employers remain reluctant to lay off workers as the pool of potential job candidates dries up and openings remain near record highs, making conditions ripe for wage gains that may spur Federal Reserve policy makers to raise interest rates by year’s end. Filings have been below 300,000 for 84 straight weeks — the longest streak since 1970 and a level typical for a healthy labor market.
“These numbers are really remarkable given that the labor force is obviously a lot bigger than it was in 1973,” said Patrick Newport, an economist at IHS Global Insight in Lexington, Massachusetts. “They tell us of a relatively healthy labor market.”

 

The other side of the labor market is quits, where people voluntarily leave a job because they’ve found something better. Those numbers are also strong meaning that we really are in a strong labor market:

The four-week moving average, which smooths out week-to-week volatility in the claims data, fell by 3,500 to 249,250 last week. That was also the lowest reading since November 1973.

As I say, lowest reading since 1973 is misleading. Unemployment claims are a useful proxy (but not exactly the same as) for layoffs. This 246,000 of a 160 million labor force is 0.15% of the labor force. Back in 1973 we had some 90 million in the labor force meaning that the same number is really 0.27% of the total. Our numbers for initial unemployment claims go back to 1967 and I would say that in percentage terms they’ve never been as low as this.

Initial jobless claims are a good early indicator of when the labor market is starting to sour because when they rise rise, they reflect an increasing number of job losses.

That’s one of those things which is sorta true but not really. Jobless claims do rise in bad economic times. But by nowhere near enough to account for the unemployment that follows. Claims are the flow into unemployment, the unemployment number is the stock of unemployed–and new job creation is the flow out of unemployment. It’s both the inflow and the outflow which contributes to the stock. The inflow does rise in recessions, yes, but the real contributor to the rise in the stock is that the outflow falls off even more. Unemployment is much more about an absence of job creation than it is about a rise in the rate of job destruction.

All of this is pointing towards the Federal Reserve raising interest rates soon enough. Essentially on the grounds that the economy seems to have recovered and so we can raise interest rates again. Do note though that it’s not so much that low unemployment and rising wages are going to create inflation. It’s that they’re symptoms that the economy is running at or near capacity, that does create inflation. The Fed’s job is to have around 2% inflation consistent with full employment. If we’ve got that second and are getting toward that first then they should be raising rates.


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