The data on regular continuing claims was encouraging this week. Regular continuing claims for unemployment insurance fell by 52,000 to 3.700 million.
The overall trend is in the right direction. They are down by 752,000 or 17.0% from a year ago. Regular claims are paid by the state governments, and run out after just 26 weeks. (Several states have lowered the number of weeks they are going to pay in the future recently. They have also been tightening up the eligibility standards.)
The graph below shows the long-term history of continuing claims for unemployment, as well as the percentage of the covered workforce that is receiving regular state benefits. It does a good job of showing just how nasty that the Great Recession was for the job market.
It also shows how things at the regular state unemployment benefit level have been getting much better over the last year (but still well above the peaks of the last two recessions). Still, we are closing in on being down to half of peak levels.
Note that the insured unemployment rate generally follows the direction of the number of claims, but has been gradually diverging over time. That is a function of the overall growth of the labor force, and of tighter eligibility standards for getting unemployment insurance over time. It also reflects the fact that this time around a very large proportion of those getting unemployment benefits are getting them from the extended Federal programs, not from the regular state programs.
In August, half of all the unemployed had been out of work for 21.8 weeks (down from a record high of 25.5 weeks in June 2010, but up from 21.2 weeks in July), and 42.9% had been out of work for more than 26 weeks. Just for a point of perspective, prior to the Great Recession, the highest the median duration of unemployment had ever reached was 12.3 weeks near the bottom of the ’82-83 downturn. Clearly a measure of unemployment that by definition excludes 42.9% of the unemployed paints a very incomplete picture.
The number of short-term unemployed (less than 5 weeks) was actually on the low side. The problem in terms of employment is not a lot of firing, but a lack of hiring. This has been the case for some time now.
After the 26 weeks are up, people move over to extended benefits, which are paid for by the Federal government. While regular claims are down, it is in large part due to people aging out of the regular benefits and “graduating” to extended benefits. Unfortunately, the data on extended claims in prior recessions is not available at the St. Louis Fed database. However, given the extraordinary duration of unemployment, it is a safe bet that they are higher than in previous downturns.
Downhill, but Bumps in the Road
The extended claims have also been trending down. The ride down has been a bumpy one, though. They (the two largest programs combined) fell by 28,000 to 3.552 million this week. That puts them 1.584 million, or 30.8% below the year ago level of 5.136 million. A much better measure is the total number of people getting benefits, regardless of which level of government pays for them. This is particularly true when looking at the longer term, not the week-to-week changes.
Combined, regular claims and extended claims (including a few much smaller programs) fell by 123,000 to 6.862 million on the week and are down 2.204 million or 24.3% below last year. (The extended claims numbers are not seasonally adjusted, while the initial and continuing claims are, so there is always little bit of apples to oranges. In addition, the continuing claims data are a week behind the initial claims, and extended claims are a week behind the extended claims data.)
People will still “graduate” from the system after 99 weeks, but people will continue to be able to move to the next tier up to the 99 week limit. Extended benefits are in four different tiers, so if benefits had not been extended by the debt-ceiling deal in Congress, some people would have lost their benefits after 39 weeks of being out of work.
Unless there is a change (extremely unlikely give the debt-ceiling deal), the extended benefits will end at the end of the year. Somehow I doubt that all of those 3.581 million people will have found jobs by then, as many employers are not even considering hiring people who have been out of work for more than six months, even if they have openings and the person is well qualified.
What we are looking at is a massive increase in poverty coming at us next year. Extending unemployment benefits for another year is a key part of the jobs bill (AJA) that President Obama just submitted to Congress. However, even if passed, it would not help those who have gone beyond the 99-week threshold.
Improving, but Still at Dismal Levels
While the employment picture has improved from a year ago, in any absolute sense it is still just plain awful. The Obama proposal was more ambitious than I had expected, but probably not ambitious enough to really solve the problem. In any case, it really didn’t matter what was in the proposal, since it was unlikely to pass Congress regardless of its contents. Congress, particularly the House, is fixated on policies that would slow the economy, not speed it up.
Fortunately, very few of the spending cuts in the first round of cuts in the deal will happen in 2011, and we get only a little bit in 2012. State-level spending cuts have been intense in 2011 and are expected to be even more so in 2012. The Federal Reserve, which was doing its part by keeping rates low and by using quantitative easing, now seems to be on the sidelines again.
Operation Twist may be effective in bringing down longer-term interest rates (it sure had that effect right after it was announced) but how much that drop in longer-term rates will help is an open question. Rates were already at historic lows.
A Divided Fed, Divided Congress
It, like the rest of Washington, is deeply divided. A $400 billion worth or rearranging of the deck chairs is not going to have all that much of an effect on the real economy. While monetary stimulus helps a little bit, it is much less effective than fiscal stimulus would be.
Right now monetary policy is sort of “pushing on a string." QE2 is over with. Operation Twist does not expand the Fed balance sheet, and thus does not really add that much to the economy.
The most recently released Fed minutes revealed that the Fed is deeply divided on what to do about the situation. The “promise” that the Fed made to keep the Fed Funds rate at the current 0-0.25% range until the middle of 2013 is causing the private sector to do a bit of quantitative easing on its own.
On of the principal aims of QE is to lower mid- to long-term interest rates, and they sure have come down a lot of late. However, the problem the economy has is not that the cost of capital is too high. Interest rates along the entire curve are at historic lows.
The problem is a lack of demand stemming from the decimation of household balance sheets in the popping of the housing bubble. If people can re-fi their mortgages, that would add some more spending power to the economy, but the people who need to re-fi the most — those who are underwater on their mortgages — can’t, regardless of how low mortgage rates go.
What the Fed Could Still Do
One thing the Fed could do is end the policy of paying banks 0.25% on their excess reserves. Ending that policy is long overdue, particularly when 0.25% is more than the rate on the two-year T-note. In effect the Fed is paying Banks not to lend. That might be a useful thing to do if the Fed were trying to drain the money supply and slow down an overheated economy, but it seems counter to their basic objectives at this time.
Unfortunately the Fed did not take that step. It would not be a magic bullet — after all, we are only talking about 0.25%, but it would be helpful on the margin. Conceivably, this is one place where you could see a negative interest rate, if the Fed wanted to try it, but those are uncharted waters, and the potential for unintended consequences is huge.
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