Is the U.S. Job Market Near a Turning Point?

• Initial jobless claims are on track to fall below 500,000 in the next several weeks.
• Normally, a level of weekly initial claims around 400,000 is consistent with flat monthly payroll changes.
• After severe recessions, however, employment can stabilize with weekly initial claims as high as 500,000.
• Strong employment growth, not merely stability, is needed to sustain a solid U.S. recovery.

Initial jobless claims, which correctly signaled a moderation in both the economic downturn and job losses, are on track to fall below 500,000 in the next several weeks. A simple model that relates jobless claims to growth in payroll employment suggests that the recovery process is in its early stages and that stabilization in the labor market is still some distance away. This analysis suggests that flat payrolls are consistent with initial jobless claims of about 400,000, about 20% below their current level.

Yet when employment stabilized following the severe recessions of the mid-1970s and early 1980s, the level of initial jobless claims was closer to 500,000, or near its current level. This is because jobless claims are influenced by more than just payroll growth, particularly when the unemployment rate is exceptionally low or high. When finding a job is extremely difficult and joblessness is elevated, the level of initial claims consistent with stable employment tends to be higher. More people than normal file for unemployment benefits in this environment, because they have been permanently let go and face difficulty getting rehired.

Given the current extreme labor market downturn, employment may in fact stabilize with claims above prerecession levels. The unemployment rate at 10.2% is nearly 6 percentage points above its cyclical low, a much sharper climb than the average 4-percentage point rise seen even in severe postwar downturns. Moreover, the recession's impact on the labor market has been muted because labor force participation has been falling. Had the participation rate remained unchanged since the start of the recession, the official rate would be north of 11%.

Those without jobs face unusual difficulty finding work. Job openings, as tracked by the Labor Department's JOLTS survey, were near a series low at the end of September. In October, the ratio of permanent to temporary layoffs stood at a record high 5.6. Moreover, according to the BLS household survey's labor force flow data, only 15% of unemployed persons found a job in October, a record low. With jobs this scarce, the number of long-term unemployed is still rising. The number of those out of work 26 weeks or less peaked back in May, but the number of those unemployed 27 weeks and longer has kept rising. This explains why the median duration of unemployment has skyrocketed while the average duration has climbed more slowly. Never has the difference between these two been as large.

While the economy may be closer to the point at which employment stabilizes than many believe, strong employment growth is necessary to support a sustained recovery, by fueling consumer spending as federal support winds down. While we expect that firms will be pressed to add workers as output rises and productivity is stretched thin, we expect something closer to the jobless recoveries of the past two business cycles than the V-shaped hiring rebound that occurred in earlier expansions. Still, labor market improvement in coming months should be significant enough to ensure that the positive feedback between confidence, financial markets and spending—the engine behind the current upturn—does not break down and cause the economy to stumble.