The Big Idea
Unemployment claims and the summer vacation bump
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For the second year in a row, initial unemployment claims surged in June. This year in particular, with the labor market showing signs of cooling and the unemployment rate creeping higher, the backup in jobless claims in June was regarded by many as further evidence of a softening in labor market conditions. However, a careful examination of the data suggests that the driver is likely the end of the school year. The latest weekly reading shows that the June rise in the number of new filers has already begun to fade.
The June unemployment claims bump
Historically, July has been a noisy month for initial unemployment claims. Scheduled summer plant shutdowns in the auto assembly industry as well as other parts of the manufacturing sector have tended to create a seasonal bulge in filers in the first half of July. In contrast, June was traditionally a quiet month for the initial claims series.
That pattern has shifted somewhat recently. Over the years, the short-term disruptions from factory furloughs in July have diminished though they are still meaningful. In the past two years, in contrast, June has become much more active. The June jump in initial claims is a very recent phenomenon. In 2022, initial claims barely moved on a seasonally adjusted basis. June corresponds to weeks 23 through 26 of the year (Exhibit 1). However, last year, the number of new filers surged from around 225,000 to as high as 260,000 at the end of June before receding in July. This year, the magnitude of the jump in June was smaller, but initial claims generally followed a similar pattern as in 2023.
Exhibit 1: National initial claims, seasonally-adjusted
Source: Employment and Training Administration.
State-by-state data
The Employment and Training Administration, the Labor Department agency that publishes the unemployment claims data every week, releases state data, though only on a not-seasonally-adjusted basis. The detailed state-by-state tallies reveal that the new pattern for initial claims in June has been narrowly driven geographically. The number of new filers both last year and this year jumped mainly in a handful of states in the Midwest and Northeast.
What do these states have in common? They tend to be heavily Democratic. Why does this matter? Because eligibility rules for collecting unemployment benefits vary widely by state and, all else equal, tend to be more liberal (no pun intended) in states governed mainly by Democrats than for Republican-led states.
The weekly unemployment claims reports each week include a table in which states can offer comments when their readings change by a significant amount. These comments in recent weeks have noted layoffs in “educational services” repeatedly in the states that I will focus on. I do not have a full explanation for why the pattern has shifted so much in recent years, but the data speak clearly. Perhaps eligibility rules were altered during the pandemic to accommodate the unusual disruptions in the labor market, creating an opening for workers who were unable to file in the past to do so. Alternatively, it could be that school districts are actually laying more people off during the summer than in the past, though this explanation seems unlikely, since the states in question tend to be among the most pro-labor and the rest of the nation does not exhibit a similar pattern.
It helps to focus on the combined unadjusted initial claims figures for three states in the Midwest, Illinois, Michigan and Minnesota (Exhibit 2). As it happens, the school year tends to end a little earlier in the Midwest than in the Northeast. While the end-of-school effect was minimal in 2022, the hump (see the red arrow) is clear for both 2023 and 2024. Unadjusted claims actually peaked in early June and were fading noticeably by the second half of June. As a sidenote, the spike seen in the latest reading for this year reflects a spike of over 10,000 in the number of new filers in Michigan, presumably related to auto assembly plant furloughs unrelated to the school phenomenon.
Exhibit 2: Midwest initial claims, not seasonally adjusted
Source: Employment and Training Administration.
The end-of-school-year effect is larger in the Northeast. To see that, look at the combined unadjusted initial claims for five states in the region – Connecticut, Massachusetts, New Jersey, New York, and Pennsylvania (Exhibit 3). The blue line shows that there was a modest rise in June 2022, but the pattern shifts noticeably for 2023 and 2024. As the school year tends to extend to almost the middle of June in many districts in the Northeast, the initial claims effect builds later in June, peaking around the end of the month. In each of the past two years, initial claims began to recede at the beginning of July.
Exhibit 3: Northeast initial claims, not seasonally adjusted
Source: Employment and Training Administration.
Gauging the school effect impact
Since the state-by-state data are only reported on a not-seasonally-adjusted basis, assessing the impact of these regional swings on the adjusted national figures requires a little arithmetic. The seasonal factors call for an increase of about 12% in unadjusted initial claims from late May through the end of June. By contrast, the number of new filers in the five Northeastern states registered a 55% surge over that period this year. If those five states had recorded a combined advance in line with the seasonals, the national figures in late June would have been about 223,000 rather than 239,000. Note that the average level in April and May was 217,000. Thus, the bulk of the national rise in claims, from 221,000 in the week of May 25 to 239,000 in the week of June 29 stems from the jump in the five Northeastern states.
Taking a look at how the initial claims series has evolved in July and August in the Northeast in each of the past two years strongly suggests that the flow of filers will normalize over the next few weeks. The Northeast has fewer manufacturing plants than the Midwest and thus tends to be less affected by summer plant shutdowns in July.
Indeed, the latest initial claims reading, for the week ended July 6, posted a sharp 17,000 drop on a seasonally adjusted basis despite the jump in filers in Michigan mentioned above to 222,000, within a few thousand of the trend prior to the end of the school year.
While the labor market is clearly moderating, as firms are slowing the pace of hiring, the weekly unemployment claims data, when examined in close detail, do not support the case that companies are significantly ramping up the pace of layoffs.
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