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What Caused Drop in Unemployment Insurance Claims?

Posted By James Sherk On October 12, 2012 @ 10:53 am In Economics | Comments Disabled

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The news that new Unemployment Insurance (UI) claims dropped sharply to 339,000 last week has raised eyebrows—and aroused suspicion the Department of Labor had massaged the numbers. In truth, there is both more and less to this story than meets the eye. The numbers are incomplete, but because of bureaucratic incompetence, not a grand conspiracy.

The Department of Labor releases information each week on the number of Americans newly filing for UI benefits. These figures shed light on the state of the economy: anything above 400,000 indicates recession territory, while figures below 330,000 show strong economic growth. Since the start of the year around 370,000 Americans have filed for benefits each week—below recessionary levels but still weak. The reported drop would indicate a sharp improvement in the job market.

Except it does not [2]. As the Department of Labor has explained, today’s figures are incomplete. One large state (identified elsewhere as California) did not get all their numbers into the Labor Department on time.

More precisely, at the start of each quarter many people must re-apply for UI benefits. The Labor Department knows this happens and “seasonally adjusts” the data downward to remove this effect—many new applicants are not really “new.” California, however, failed to report the number of workers reapplying for benefits. As a result the seasonal adjustment factor overcompensated. The reported drop came from fewer-than-expected people reapplying for UI benefits because California messed up— not fewer people getting laid off.

Next week this process will reverse. Normally new UI claims drop sharply the week following a new quarter. Seasonal adjustments adjusts the figures upward to counteract this. Next week the new claims will not fall as much as they normally do, which will cause the number of seasonally adjusted claims to jump.

Neither this week’s large drop nor next week’s impending jump in UI claims say anything about the state of the economy. They only show that large government bureaucracy’s often cannot get their act together.


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URL to article: http://blog.heritage.org/2012/10/12/what-caused-drop-in-unemployment-insurance-claims/

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[1] Image: http://blog.heritage.org/wp-content/uploads/jobs-unemployment-want-ads.jpg

[2] Except it does not: http://www.cnbc.com/id/49372827

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