The Labor Market Picture in Review and Speculation on Whether More Federal Spending Would Improve Labor Market Measures 

Every week brings two new pieces of information to labor market observers – the initial and continuing unemployment claims figures.  Combining these high frequency data points with other indicators on production, consumption, and investment give analysts some inclination of where the labor market may be headed.  What did we learn about the labor market this week and what does it mean in the broad picture?

First on the initial claims side, seasonally adjusted figures came in at 366,000, an increase of 0.5 percent from the prior week.  On a generally more stable four week moving average basis, initial claims declined by 5,500.  When looking at the yearly numbers, initial claims are a few thousand above where they were in March of this year.  Are these figures good?  That’s where it gets tricky because by the past 40 years historical standard, the answer is no – the initial claims numbers are still elevated and have room to fall another 70,000 at least.  On the other hand, many professional analysts are concerned that there’s a “new normal” in the labor market, which in layman’s speak means that they think the American labor market experience is becoming more European – higher unemployment rates, higher long term unemployment, and slow wage growth.  Individuals seeing the human capital world through this lens likely see the recent numbers as encouraging, largely because they have lowered their expectations.  Who’s right then becomes largely a philosophical question.

On the continuing claims side, things don’t look as good, although in the recently released figures continuing unemployment insurance claims decreased 0.9 percent from 3.34 million of the prior week.  On the often quoted four week moving average, the figures increased by 4,000 through the first week of August.  When looking at the yearly figures, the decline in continuing unemployment insurance claims has largely come to a halt, with overall claims about where they were in April of this year.  So, are these figures good?  The same issues apply here as they did for the initial claims numbers, although the “new normal” debate largely has more evidence to support it when it comes to continuing claims.

With these figures in mind, what could one speculate on one of the biggest topics of the day – the relationship between federal government spending and the national employment picture?  Some economists and professional analysts think that the relationship looks something along the lines of that shown in the following picture, where there’s a negative relationship between federal spending and initial claims (or you could choose some other labor market indicator).  Basically, when federal spending increases, initial claims decrease.  On the other end of the debate spectrum are those pointing out that the relationship looks something like the chart that contains the 2005 to 2007 data, where federal spending is correlated with increased initial unemployment insurance claims.  The reasons behind the observed outcomes are well known; the debate, though, will likely continue until individuals generally move away from government support.  Who is right?  From my perspective, the burden of proof lies with individuals wanting more government spending, and on this point, they generally are unable to show the empirical correlation for one reason or another (the third chart that follows has all the years combined).  The public, though, doesn’t appear to think the burden of proof lies with the big spenders, but rather on the budget cutters.  Why?  My guess is it’s a scrooge kind of thing.  Overall, individuals wanting less government meddling need to rethink their marketing message; they’re right, but being right is only a quarter of the story.