Jobless claims

What Are Jobless Claims?

Jobless claims refer to the number of individuals who file for unemployment benefits with their state's unemployment agency. This economic indicator is a key component of macroeconomic analysis, providing insights into the health and stability of the labor market within the broader field of economic indicators. There are two primary types of jobless claims: initial jobless claims and continuing jobless claims. Initial jobless claims represent new applications for unemployment insurance, reflecting emerging unemployment. Continuing jobless claims, also known as insured unemployment, count individuals who have already filed an initial claim and are continuing to receive benefits for subsequent weeks of unemployment. The U.S. Department of Labor issues a weekly report tracking these numbers, which are closely watched by economists, policymakers, and investors for clues about the direction of the economy.³⁵

History and Origin

The concept of unemployment insurance in the United States emerged as a response to widespread joblessness, particularly during the Great Depression. Before this period, state relief programs struggled to cope with the millions of unemployed workers.³⁴ The first unemployment insurance program in the U.S. was established in Wisconsin in 1932. The federal framework for unemployment insurance was then created as part of the Social Security Act of 1935.³³ This landmark legislation recognized both national and state concerns over unemployment and aimed to alleviate its impact by establishing a federal-state system where states administer their own unemployment insurance programs.³² The act also included a tax offset provision that incentivized states to enact their own unemployment laws, as employers could credit state unemployment tax payments against a portion of their federal tax.³¹ Since 1967, the U.S. Department of Labor has consistently tracked and reported initial jobless claims data, offering a long-term perspective on labor market trends.²⁹, ³⁰

Key Takeaways

• Jobless claims are a crucial weekly economic indicator published by the U.S. Department of Labor, reflecting the number of people applying for or continuing to receive unemployment benefits.²⁷, ²⁸
• Initial jobless claims indicate new layoffs and emerging unemployment, while continuing jobless claims represent those still receiving benefits.
• This data provides a near-real-time snapshot of the labor market, often preceding other broader economic reports.
• Changes in jobless claims can signal shifts in economic conditions, such as recessionary periods or economic recovery.²⁶
• The data is subject to weekly volatility, which is often smoothed by observing the four-week moving average for a clearer trend.²⁵

Interpreting Jobless Claims

Interpreting jobless claims involves understanding what the numbers signify for the overall economic health. A rising number of initial jobless claims generally indicates an increase in layoffs and a weakening labor market. Conversely, a declining trend suggests fewer job losses and an improving employment situation. However, weekly jobless claims can be volatile, making it more insightful to observe the four-week moving average, which helps to smooth out week-to-week fluctuations and identify underlying trends.²⁴

Economists often compare the reported figures to market expectations to gauge the potential impact on financial markets. For example, a lower-than-expected figure for initial jobless claims might be viewed positively for the U.S. dollar and the broader economy, while a higher-than-expected number could be seen as a negative sign.²³ While initial jobless claims are a leading indicator of emerging unemployment, they do not directly equate to the total number of unemployed individuals, which is captured by the unemployment rate reported by the Bureau of Labor Statistics.²²

Hypothetical Example

Imagine a hypothetical scenario where the U.S. economy is experiencing a period of uncertainty. For several weeks, the reported initial jobless claims hover around 250,000. In a particular week, the U.S. Department of Labor announces that initial jobless claims have jumped to 350,000. This significant increase of 100,000 new claims could suggest that more companies are laying off workers, potentially indicating a slowdown in economic activity.

Following this, if continuing jobless claims also begin to rise sharply over subsequent weeks, it would further reinforce concerns about sustained joblessness. This sustained rise in both initial and continuing claims might prompt economists to revise their forecasts for gross domestic product (GDP) and other key economic indicators, suggesting a potential contraction or a more significant economic downturn. Investors might react by shifting their portfolio allocation away from riskier assets.

Practical Applications

Jobless claims data serve several practical applications for various stakeholders in the financial world and beyond.

• Economic Analysis: Economists and analysts use jobless claims as a high-frequency measure of labor market health. Since the data is released weekly, it offers a more current snapshot compared to monthly or quarterly economic reports.²¹ This allows for a near real-time assessment of emerging employment trends and potential shifts in the business cycle.
• Monetary Policy: Central banks, such as the Federal Reserve, closely monitor jobless claims as part of their assessment of labor market conditions.²⁰ These data points inform decisions related to monetary policy, including interest rate adjustments, as a tight labor market can influence inflation.¹⁹
• Investment Decisions: Investors pay close attention to jobless claims reports as they can impact market sentiment and asset prices. Unexpectedly high claims can signal economic weakness, potentially leading to a stock market decline, while lower claims might indicate a strengthening economy and boost investor confidence. This information is integrated into fundamental analysis.
• Government Policy: The data also guides government agencies, like the U.S. Department of Labor, in assessing the effectiveness of unemployment insurance programs and identifying areas requiring additional support or intervention.¹⁸ The U.S. Department of Labor publishes comprehensive weekly data and historical insights related to unemployment insurance claims on its website.
• Consumer Spending Forecasts: A rising number of jobless claims can suggest a weakening consumer base, potentially leading to reduced consumer spending, which is a major driver of economic growth.

Limitations and Criticisms

While jobless claims are a widely followed and valuable economic indicator, they have certain limitations and face criticisms. One significant limitation is their inherent volatility. Weekly fluctuations can be substantial due to various factors like holidays, seasonal adjustments, and isolated events, making it challenging to discern a clear trend from a single week's report.¹⁷ To mitigate this, economists often rely on the four-week moving average, which smooths out these erratic movements.¹⁶

Another criticism is that initial jobless claims primarily reflect job separations rather than overall labor market strength or new job creation. They do not capture individuals who are unemployed but not eligible for or not applying for unemployment benefits. Furthermore, jobless claims data can be less informative during periods of economic expansion, as they may not consistently predict the direction of the unemployment rate when claims are already low.¹⁵ Historical analysis has shown that while jobless claims can be useful in identifying turning points, particularly at the end of recessions, their predictive power for the exact direction of unemployment can vary.¹³, ¹⁴ The relationship between initial claims and the broader unemployment rate can be inconsistent, especially during economic expansions.¹² For instance, the Federal Reserve Bank of St. Louis has noted that the common "rule of thumb" threshold of 400,000 initial claims as an indicator of weakening labor market conditions has seen its optimal threshold vary over time.¹¹ This suggests that a static interpretation may not always be accurate and requires contextual understanding based on prevailing market conditions.

Jobless Claims vs. Unemployment Rate

Jobless claims and the unemployment rate are both key indicators of labor market health, but they measure different aspects and are collected through distinct methodologies.

While jobless claims provide an early look at new layoffs and a sense of hiring momentum, the unemployment rate offers a more comprehensive picture of the entire labor market, including individuals not covered by unemployment insurance.

FAQs

What is the difference between initial jobless claims and continuing jobless claims?

Initial jobless claims refer to the number of people who have filed for unemployment benefits for the first time. Continuing jobless claims, also known as insured unemployment, count people who have already filed an initial claim and are receiving benefits for additional weeks of unemployment. Initial claims signal emerging unemployment, while continuing claims indicate sustained unemployment.

How often are jobless claims reported?

Jobless claims are reported weekly by the U.S. Department of Labor.⁴ This makes them one of the most timely economic indicators available.

Why do financial markets react to jobless claims?

Financial markets react to jobless claims because they are a leading indicator of the labor market's health and the broader economy.³ A significant increase in claims can signal a weakening economy, potentially leading to concerns about corporate earnings and consumer confidence, while a decrease suggests economic improvement. Traders and investors use this information to anticipate future economic cycles and adjust their strategies in areas like equity valuation or fixed income analysis.

What is a "good" number for jobless claims?

A "good" number for jobless claims is generally one that is low and/or decreasing, as this indicates fewer people are losing their jobs. For initial jobless claims, a figure consistently below 300,000 to 400,000 is often considered a sign of a healthy labor market, although this threshold can vary based on the overall size and dynamics of the labor force.² Trends are more important than any single week's number due to the volatility of the data. Investors often watch the moving average to identify these trends.

Are jobless claims seasonally adjusted?

Yes, the U.S. Department of Labor typically releases both seasonally adjusted and unadjusted figures for jobless claims.¹ Seasonal adjustment attempts to remove the influence of predictable seasonal patterns (like holiday hiring or seasonal layoffs) from the data, providing a clearer picture of underlying economic trends. Analysts generally focus on the seasonally adjusted numbers for more accurate economic forecasting.