As an investor, you have a huge amount of information at your disposal. Various government agencies and private organizations collect and present a wide variety of data. Some data releases, such as the Conference Board's index of leading economic indicators, provide a broad picture of the overall economy. Other types of data focus on very specific information, from which you must extrapolate more general conclusions. The challenge you face is trying to reconcile all the information available to you in a coherent manner.
One very specific piece of information (available every Thursday) is the number of people filing first-time claims for government unemployment insurance benefits. Colloquially known as the jobless claims number, this information is a clear reflection of the challenges faced by the working population. This article looks at what's involved in filing a claim for unemployment benefits and examines the way the Department of Labor collects and adjusts the data to present the jobless claims figure.
The basic concept
When workers are laid off temporarily or permanently, or otherwise involuntarily lose their jobs, many of them become eligible to collect unemployment insurance benefits from the government. The benefits are referred to as insurance because the government collects contributions in the form of taxes from employers. The federal unemployment insurance tax of 6.2% on the first $7,000 of each employee's wages corresponds to $434 for any worker making more than $7,000 in a given year. Employers must pay at least this amount; most states also impose unemployment contribution requirements, which employers may use to offset their federal obligations in part.
When workers become eligible, they can generally file a claim for unemployment benefits within a very short period of time. Many states allow workers to file claims electronically on the Internet. Unemployment programs are a joint effort of federal and state governments, and the qualifications and amount of benefits differ from state to state. However, in general, unemployment benefits include a relatively small amount of money to help with basic needs, along with assistance in obtaining a new job or additional training provided through government agencies.
Because workers making jobless claims have necessarily stopped working, the number of initial claims provides quick feedback on changes in employment trends. However, it's important to realize that just because workers file for unemployment benefits, it doesn't mean that they have permanently lost their jobs. Many industries -- including manufacturing, construction, and agriculture -- involve employment cycles that require workers to face frequent temporary or seasonal layoffs. On the other hand, permanent restructuring is a fact of life in today's job market. Earlier this month, Intel
To incorporate predictable, recurring events such as regular temporary plant closings, students returning to school, and the holiday shopping season, the Labor Department makes seasonal adjustments to the jobless claims numbers. In looking at data for previous years, there are often huge downward seasonal adjustments in July, December, and January; significant upward adjustments in August and September; and more moderate upward adjustments throughout much of the remainder of the year. In addition, seasonal adjustments allow for spikes in claims that generally occur in the first week of each new quarter. Although seasonal adjustments help to smooth the data and make comparisons across weeks easier, some criticize the adjustments as arbitrary and deceptive. However, the Labor Department releases the unadjusted raw number in each press release; it just rarely gets reported.
Even with seasonal adjustments, the jobless claims number is quite volatile and can differ greatly from week to week. Many economists therefore look at the average of the numbers for the previous four weeks, where trends in the data are less affected by outlying results in a particular week.
Economic implications
The jobless claims number is a very limited direct measurement of labor activity, but it has significant implications on the overall economy. Workers who claim unemployment benefits are no longer working -- though through no fault of their own. Since they no longer earn their wages, they must reduce consumption until they can find new employment or until a temporary layoff ends. Although unemployment benefits provide some relief, they can be much smaller than the worker's usual paycheck. The reduction in consumption can ripple through the economy; when layoffs are concentrated in a particular locality, the local economy can be devastated as a result.
Nearly all economists agree that no economy can sustain full employment of all workers, so eliminating jobless claims entirely is not a goal that government policy analysts strive to achieve. In recent years, jobless claims have generally ranged between 275,000 and 475,000, with levels above 400,000 causing concern among labor analysts. In this context, the number of 318,000 released yesterday is on the low end of the range, indicating a generally favorable job environment.
Note, however, the limitations of the jobless claims data. The number of jobless claims reflects only those who have been involuntarily terminated or laid off. It does not reflect the nature of the jobs held by workers, nor does it compare the capacity and skills of workers to the work they are actually doing. For instance, some workers take lower-paying jobs that they are overqualified for in order to earn enough money for their living expenses. Although most would agree that a high number of underemployed workers isn't ideal, the jobless claims numbers by themselves cannot confirm or deny underemployment..
In summary, jobless claims data can give you a quick snapshot of the overall economy through its workforce. Although the number can't provide a detailed picture, it is easily compiled and can indicate trends in employment practices.
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Fool contributor Dan Caplinger can count on avoiding the unemployment line, as long as he doesn't decide to fire himself. He doesn't hold positions in any of the companies mentioned in this article. The Fool's disclosure policy is always hard at work.
