450,000: The likely threshold of new claims for unemployment benefits, above which the economy is likely losing jobs and below which it is adding jobs.
The unemployed are more likely to apply for government benefits than they used to be, and it’s changing how economists use reports of new jobless claims as a gauge of labor-market health.
An economic rule of thumb that generally held through the recessions of the1970s, 80s and 90s was that when new weekly claims for unemployment benefits rose above 400,000, the economy was cutting jobs and when claims were below that level, jobs were being added. Indeed, in the latest survey of economists by the Wall Street Journal, most respondents still put the threshold at the 400,000 level. But new claims spent much of 2010 and 2011 above 400,000 even as the economy steadily added jobs.
Recent research by the St. Louis Fed put the threshold since 2008 at 450,000, and noted that the level actually moves around over time. An analysis by Zach Pandlof Goldman Sachs noted similar results. Pandl showed that the relationship of claims to the change in employment fluctuates during the course of the business cycle. The threshold falls when more people are quitting and it rises when a greater share of the unemployed are applying for benefits. Pandl’s analysis of October data put the threshold at about 435,000 for that month.
That the threshold is rising isn’t necessarily as surprising as the fact that it held up for so long. After all, the population was a lot smaller in the late 1970s than it is today. In 1976, 400,000 people represented 0.42% of the labor force compared to 0.26% today. The reason the level held up even amid a rising population has to do with the take-up rate, which measures how many of the unemployed actually apply for benefits.
The take-up rate declined through much of the late 1970s and 80s, according to research from the San Francisco Fed. The authors of the Fed paper, Aisling Cleary, Joyce Kwok and Rob Valletta, cite research showing the decline was the result of falling unionization and unemployment shifts toward states with lower benefit take-up rates. “Lower rates of unionization affect UI take-up because unions provide resources that ease filing procedures for members,” they write. “The variation in take-up rates across states is less easily explained, but probably reflects cross-state differences in cultural norms regarding participation in public programs.” Since fewer of the unemployed applied for benefits, it allowed the population to rise while the threshold stayed relatively steady.
But that trend is changing. This recession has seen the take-up rate move higher than it has in recent years. In his analysis, Pandl of Goldman cites potential reasons: “(1) a more generous unemployment insurance program, (2) greater financial distress among households, and therefore more need for benefits, or (3) greater pessimism about the ability to find new work.” Though the trend has been exacerbated by the recession and slow jobs recovery, it actually began in the 1990s.
The San Francisco Fed research notes that take-up rates have been steadily increasing for some time. Part of the reason could be a shift in the pool of the unemployed. Through the 1970s and 80s when the labor force increased, a large share came from younger workers and women working for the first time. These groups were counted as unemployed when they started looking for work but weren’t eligible for unemployment benefits. Now a larger share of the newly unemployed are job losers, not people entering the work force. That means more people eligible for benefits.
If the increases in the take-up rate are here to stay, it could mean so is the higher threshold for jobless claims.