Unemployment, Initial Jobless Claims, and Non-Farm Payroll

How active or strong is the workforce of a country?

Let’s think it in this way. A country may be full of resources, may have the latest technology available and most probably that is a very good recipe for a country to grow strong and to continue its development. However, a country is made of people and any desired development comes from the astuteness of the people to provide products or services in exchange of money.

We could categorise the people, or let’s call them the workforce of a country, in two categories: (a) Entrepreneurs; (b) Employees.

Both categories play a crucial role in a country, but of course, in different ways. Entrepreneurs would come with a business idea, either new or copied from somewhere else, and would start a business in order to make money from it. The employee on the other hand, is somebody who does not want to start his or her own business but would prefer to receive a certain amount of money, usually known in advanced, in exchange for his or her services based on the knowledge and experience that the person possesses.

The entrepreneurs are willing to put their money and to take the risk of starting a business with the expectation of making money, money that is uncertain. On the other hand the employee assumes a lower risk trying to define a known salary, sharing the company risk of not making money, but not the risk of losing money through the business.

So what happens when unemployment starts rising?

This is an easy one! Basically less money is circulating in the economy. And why is that? Well, think about it. If you do not have a job, most probably you will be somehow concerned that you still need to pay your water bill, electricity bill, groceries, and hobbies using the money that you saved hoping that you will find a new job before you burn your savings. And what does that mean? That also means that now entrepreneurs will also start getting less money since the people will need to start saving in order to make front to the fact of not having a job. Therefore, people will be now buying less products and using less services that require payment. As the story goes by, this sounds like becoming a vicious circle where everyone is losing, and therefore, the country is losing as well.

But, how can we now if the workforce is actually on the rise or declining. Is there a way to foreseen the unemployment which data is released every month?

The answer is yes. And for that we can focus on the Initial Jobless Claims and Continuing Jobless Claims.

How does it work?

Simply put, if someone lost the job, most probably will go the Unemployment Office, to obtain some money that the employer and/or the employee put in case the employee losses the job and becomes unemployed. Then, the Unemployment Office collect that data and provides it to the Institute of Statistics who will release the data for everyone to see what is happening in the labor market.

Let’s see how does these two variables look in a chart.

Source: Federal Reserve Bank of St. Louis

As expected, the unemployment rate does have a lag effect compared to the jobless claims.

Now if we consider USA Initial Jobless Claims, what has been the yearly initial jobless claims on annual basis and in average, how many people claim it?

Source: Federal Reserve Bank of St. Louis.

On average, a total of 348,000 people filed initial jobless claims in the USA. The average excludes the year that the world was hit by covid-19, where initial jobless claims exploded to 1.3 million.

Is it possible to have an idea if the workforce is potentially weakening? We could have an idea when considering the trend i.e. the last 26 weeks. Let’s see how this looks in a chart:

Source: Federal Reserve Bank of St. Louis.

The chart illustrates the case where even though the initial jobless claims variate each week, the trend of the last 26 weeks is actually on the rise, which explains that the workforce most probably is loosing strength.

In the same way that we analysed unemployment and initial jobless claims, we can now quickly dive in a popular measure named non-farm payrolls. 

The non-farm payrolls basically is a measure of the number people that work in any other area besides agriculture, private household, non-profit organizations that do not have significant payrolls, and self-employed workers.

Why does USA use this measure? Why is it important? The answer lies on at least two reasons (a) The country’s labor market, or simply put, the percentage of workers that work in different industries, for example, farms or agriculture (b) the agriculture sector does not employ workers on long term basis due to seasonality, which makes the sector volatile to measure. Let’s quickly have a look at the U.S.A. labor market:

Source: U.S. Bureau of Labor Statistics

In 2023, the total employment in U.S.A. was around 50% of its total population. Now, from the total population we must take into consideration i.e. young people that are not qualified to work yet due to age, elderly people who already retired, etc. The U.S. Bureau of Labor Statistics states that the civilian non-institutional population was 267.99 million people in December 2023, where 167.45 million were employed and/or looking for work. Hey! so that means that actually around 80% of U.S.A.’s total population would be considered as its workforce. Following the same thought, that means that approximately 62.5% of the workforce is interested in working (167.45 out of 267.99). Now, from the 167.45 million people, 6.3 million approx. were actually looking for work but could not find one (unemployed). So, after some simple maths you will get to the conclusion that those 6.3 million people represent 3.7% of the people interested in working but could not find a job. Furthermore, from the 167.45 million people 0.9% were related to the agriculture, forestry, fishing and hunting sector, plus 5.8% of self employed workers, which represents approx. 11.2 million people.

Now do your maths and imagine how the changes in this item would distort the analysis of the employment in U.S.A. For example, imagine that in one month time 1 million people loss their seasonal job, then the unemployment would rise from 3.7% to 4.4%!

As we wrap up this data adventure, remember this: the workforce is like a rollercoaster ride—full of ups, downs, and unexpected twists. By diving into these numbers, we not only get a snapshot of where the economy stands today but also the roadmap to where it may head tomorrow. So, buckle up and keep your eyes on the data—it’s going to be an exciting journey ahead!