Big changes in the labor market

The weekly unemployment claims data is among the most timely indicators available to track the economy's progress, which is why I post on this subject almost every week. In fact, the only thing timelier is market-based data, which is real-time. 

Claims last week came in as expected, and they were almost identical to the average so far this year (370K vs. 369K). So there hasn't been much change this year in the underlying health of the jobs market, according to this measure.

But there has been a great deal of change, to judge by the 2.4 million decline in the number of people receiving unemployment compensation year to date. There are still an unusually large number of people receiving unemployment insurance given that we are three years into a recovery, but at least the number is declining steadily: it's down over 20% in the past 12 months, and down by one-third so far this year.

The chart above shows how different this recession has been from other recent recessions: at the peak, the percentage of the labor force receiving unemployment compensation was 67% more than at the peak of the 1981-82 recession. This goes a long way to explaining why this recovery has been so tepid. It's been the weakest recovery ever, in part because we've never paid so many people for so long not to work. And the main cause of that huge increase was Congress' decision in July 2008 to create a program called "Emergency Claims," which went on to double the number of people receiving benefits by early 2010. Congress' "compassion" for the unemployed had the unintended consequence of slowing and drawing out the recovery for everyone.

These charts document the single biggest change on the margin that is happening to the U.S. economy these days. Fortunately, it is a positive change on the margin, since it results in increased incentives to find and accept a new job, even if it doesn't pay very much. In the end, the only way a true recovery can take place is if unwanted labor is able to relocate and reprice itself so as to be attractive to new employers. That process is clearly underway, and it is one very good reason why the economy should continue to grow.