The magic 400,000 threshold

Smart people like Calculated Risk continue to argue that we won't see positive jobs growth until initial claims for unemployment insurance drop below 400,000. Hence the latest report showing the four-week average of initial claims as of yesterday was 462,000 indicates that, Punxsutawney Phil-like, we are doomed to experience another month of job losses.

True, if you run a regression of the change in employment on initial claims you get something like a 400,000 threshold. And true, coming out of the last recession employment didn't start rising until initial claims fell under 400,000 (that was in September 2003). But that was a pretty strange recession. For one thing, it was incredibly mild and the recovery was very protracted. For another, initial claims were actually below 400,000 throughout most of the recession and recovery, even as employment was falling.

But in each of the recoveries that followed the 1974-75, 1981-82 and 1990-91 recessions, employment started to rise well before initial claims fell below 400,000. As the graph below shows, following the 1974-75 recession employment growth turned positive once and for all in July 1975. That month, initial claims were 445,000 while jobs increased by 249,000. Initial claims didn't dip below the 400,000 mark until November. By that time employment had increased by 1.2 million.

Recovery from the 1981-82 recession: employment growth turns positive for good in March 1983 (+173,000) while initial claims are 481,000. Initial claims don't fall below the magic 400,000 until October (by that time the economy had created 2.3 million jobs!). [Note: this is monthly data; Eviews is messing up my horizontal axis labels for some reason.]

Recovery from the 1990-91 recession: Employment begins to rise for good in March 1992 (+50,000) while initial claims are 428,000. Initial claims rise to as high as 442,000 before dropping below 400,000 in October. By that time 818,000 jobs had been created.

So excepting the 2001 recession, during previous recoveries employment began increasing 4 to 7 months before initial claims fell below 400,000. Four hundred thousand is not the magic number.