Looking at structurally high unemployment as recalculation

Unadjusted jobless claims after the holiday season are always monstrous because of seasonality. Last week 645,571 people filed initial claims for unemployment insurance in the United States.  That is down from the 731,958 who filed at this time last year. Looking at the seasonally adjusted numbers, claims rose from to 434,000 last week from 433,000 the week prior. However, significantly, the 4-week average continued to fall. it is now 450,250 versus 460,500 the week prior. Exactly 3 months ago this number was 540,500 and a year ago it was 528,000. So initial claims are definitely falling.









Jan. 2

Dec. 26


Dec. 19


Initial Claims (SA)






Initial Claims (NSA)






4-Wk Moving Average (SA)













Dec. 26

Dec. 19


Dec. 12


Ins. Unemployment (SA)






Ins. Unemployment (NSA)






4-Wk Moving Average (SA)







The problem is not that initial claims are falling but that no one is yet hiring in number.  For example, Tyler Durden of Zero Hedge recently posted an article questioning the unemployment insurance benefits line in the U.S. Treasury’s daily cash deposit and withdrawal statement. He noted a 32% discrepancy between how much was was being paid out and what should have been paid out based on the numbers.

I believe this discrepancy can be accounted for by the huge numbers of people now getting up to 73 weeks extended unemployment insurance benefits. Officially, there are 4.8 million people collecting unemployment benefits.  But, this number just includes those who are in the normal 26-week program. There are double the number of people actually receiving benefits if you add those receiving extended benefits. Moreover, many have exhausted even the extended benefits.  Clearly, there are some serious re-adjustments going on.

I would argue that one reason under- and unemployment is so high has to do with what Arnold Kling calls recalculation. This results from what in Austrian economic circles is known as malinvestment.  Kling says:

I would caution that terms like "aggregate demand" and "aggregate supply" are totally artificial constructs. Back in the real world, the economy has no idea what they mean, and the unemployed have no way of labeling themselves as cyclically or structurally unemployed.

It may be useful to behave as if one had never been taught to think in terms of aggregate demand. Instead, suppose that I had to start with a blank sheet of paper and describe the state of the economy. I would say that the balance between workers exiting declining firms/industries and entering expanding firms/industries has disappeared. Instead, we have had over a year in which exit took place at a faster rate than entry.

Another way to put this is that the economy is only gradually learning where the expanding firms and sectors will be. As it learns more, employment growth will resume.

I wouldn’t dismiss the aggregate demand concept out of hand. However, looking at demand only in ‘aggregate’ misses the fact that supply and demand vary across sectors of the economy for goods and for labor. Supply of and demand for nurses is not the same as it is for builders and contractors. So Kling is right to distinguish between the recalculation of society’s industrial organization and total demand in the aggregate.

Using the example I just made, nurses are coveted and in demand because of our aging population and general need for healthcare.  On the other hand, due to the massive bust in housing starts, builders and roofers are not as sought after. Right now, ‘structural’ unemployment is higher because of recalculation – the restructuring of our society’s industrial organization.

Unemployment will stay higher for longer because the misallocation of resources in the boom was so large. When economists let Bernanke and Greenspan off easy for recklessly low interest rates, they are missing the effect this policy has on the internal organization of capital and labor within our society. People built lives around and started careers because of the boom in real estate over the last decade. Now, that’s all gone bust – and those people need to re-tool and find a job somewhere else.  Some of them will never re-attain their previous earnings power. Many will be unemployed for years. That’s the reality today, just as it was in 1982 as the manufacturing sector left the U.S. en masse.

It was recklessly low rates which created this malinvestment. So, while the Fed is not entirely at fault in this mess, its policymakers needs to take on much of the blame, something Ben Bernanke is unwilling to do.  As we move forward, it would also be nice to see someone realize that propping up bankrupt companies in finance, autos or housing only serves to perpetuate the misallocation of resources and makes things worse.



Unemployment Insurance Weekly Claims Report – U.S. Department of Labor

Distinguishing Recalculation from Aggregate Demand – Arnold Kling


Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.