Ineligible: Uncovering the Real Employment Gap

Chart of the Week, October 17, 2012
By Eric Schaefer of American Independence Financial Services

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Perhaps it is because we are in the midst of the quadrennial Presidential election cycle. Nerves are certainly frayed and tempers on edge. In such a climate, it is inevitable that partisanship and passion gets the better of compromise and discretion.

How else can one explain the crazy accusation for which the media has kindly provided a microphone and platform. Which one? Well the allegation that the economists at the Department of Labor (DOL) have been cooking the books. Where others see conspiracy, we see coincidence. In light of what passes muster for analysis in the media and industry, there is little need to fudge the numbers. If past practices provide any guide, most commentators can be counted on to just recite the headlines with little effort expended to understand or explain the trends.

Last week the Bureau of Labor Statistics (BLS) reported the unemployment rate slipped to 7.8 percent in September from 8.1 percent the month before. Just this week, the Department of Labor announced initial estimates for new unemployment claims filed for the week ending October 30th, fell by 30,000 versus the week before. At first glance, the headline numbers suggest the labor market is on the mend. In both cases the media after first giving each story a positive spin, then gave a podium to the naysayers who alleged the numbers were fixed.

This is a pity since the naysayers are right in their basic assertion that labor market conditions have not improved as much as the headlines might imply. Had the same commentators dug into the numbers they would easily have discovered cause for alarm as well as sufficient evidence to cast that unfounded allegations of bureaucratic connivance aside.

Regarding the recent decline in initial filings for unemployment, the real story is not the trend in the headline number but the change in a related statistic which rarely merits a mention in the press. In conjunction with tabulating the number of new and continuing unemployment claims filed and paid, the DOL also tracks the number of workers for whom employers are paying unemployment insurance premiums. Covered employees stand at approximately 127.5 Million as of September 15th. Year-to-date, employers are paying premiums for 1.3 Million more workers. This increase roughly comports with the increase in employees (over the same period) in the establishment survey.

The number of covered workers provides another measure in addition, to the establishment and household surveys to gauge labor market conditions. The gap between the high water mark and current levels gives pause for concern. The number of covered employees topped out in the current cycle at 133.9 Million before dropping during the Great Recession. So using this yardstick there is still much lost ground to reclaim 6.4 Million jobs worth. Using the establishment survey (of business and government payrolls) suggests the gap is just 4.5 Million. And, using the household survey (in which respondent indicate if they are employed or not) the gap is even smaller at 3.3 Million.

Both the establishment and household numbers are based on statistical surveys: each estimates the employment by using samples of employers and individuals, respectively. In contrast, the weekly unemployment claims filings statistic has the virtue of being an actual enumeration. After all real cash is involved: flows paid to individuals out of a job, financed by premiums levied on employers based on their payrolls. Thus there is a practical precision built into the unemployment claims statistic.

We suspect the drop in new initial filings is actually a sign of distress. The absolute number is determined in part by the pool of covered workers. A lower number of covered workers implies fewer individuals can claim to unemployment benefits. The ineligibles who have exhausted their benefits and remain out of work continue thought to cast their shadow.


Notes on Sources and Methods:

Grey shaded regions indicate recessionary periods as determined by the National Bureau of Economic Research (NBER).

All data sourced from the Department of Labor (DOL) and is presented on a non-seasonally adjusted (NSA) basis. In other words, the claims data has not been adjusted for observed past seasonal patterns which may inflate or depress filings relative to the trend for the year.

We have smoothed out fluctuations in the ratio of filings to covered persons using a 53 week running average (dark blue, solid line). The average is centered about the mid-point of each 53 week window. Correspondingly, there is no adjustment at beginning and end tails of the series.

In the narrative we cite statistics for the establishment and household surveys. Both are components of the Bureau of Labor Statistics (BLS) monthly Employment Situation report. The establishment survey estimates employment levels based on a sample of payrolls for selected businesses, non-profits and government entities. The household survey estimates employment based on responses from selected households.

(Sources: DOL; BLS; NBER; and, AIFS estimates.)


About American Independence Financial Services, LLC

American Independence Financial Services, LLC ("AIFS") is the investment adviser and administrator for the American Independence Funds and the NestEgg Target Date Funds. The firm is a limited liability company founded in 2004.

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