Initial Claims for Unemployment Insurance fell by 5,000 over the last week to 457,000, and are far below the year-ago level of 644,000.

Weekly claims can be very volatile, so to get a better sense of the overall trend, the four-week moving average is generally considered a better measure to look at. It edged down by 4,250 to 471,250, and is down from 650,000 a year ago.

As the chart below shows, after climbing to hights not seen since the early 1980’s, the four week average of jobless claims started a swift descent that lasted until the end of 2009, then started to rebound, only to start to fall again over the last two weeks.

While the decline from a year ago is good news, we are still close to the highest levels we saw during both the 1991 and the 2001 recessions. We probably need to see the four-week average get down to close to the 400,000 level to indicate that the economy is, on balance, adding jobs. We are back to heading in the right direction, but still have a ways to go.

Continuing Claims

While the news on initial jobless claims is moderately positive, the news on continuing claims is mixed to negative. Regular continuing claims fell by 12,000 to 4.579 million, 15.8% below the year-ago level. However, regular continuing claims are paid for out-of-state unemployment insurance funds, and generally run out after 26 weeks.

After that, people move on to extended claims, which are paid by the Federal government, mostly from funds provided by the ARRA, also known as the Stimulus Act. There, the picture is not nearly as pretty. Extended claims rose by 353,000 to 6.044 million, and are almost triple the year-ago level of 2.091 million.

The rise this week was a bit of a surprise, since the data is released with a two-week delay (and a one-week delay for regular continuing claims). Two weeks ago, an extension of benefits was held up in the Senate, which caused many people to be temporarily thrown off the extended benefit rolls. However, it appears they were put back on the rolls in time for the numbers to be tabulated.

Extended claims are very helpful from a humanitarian point of view at a time when there are five job seekers for every job opening. By the time people have been out of work for six months, it is highly likely that they have already drawn down their savings and run up their credit cards. That probably includes drawing on 401-k accounts. When people do that, the money withdrawn is taxable, and they have to pay a 10% penalty.

With one out of four homeowners with mortgages now underwater and millions more extremely close to “sea level,” the option of drawing on home equity is not open the way it had been in previous downturns. Thus without a paycheck, these people are left with no financial resources at all. That is clearly a severe hardship on the families involved.

However, it is also very bad news for the economy overall. The money from extended benefits tends to get spent quickly and spent on basic necessities. This means they can buy their groceries and other basic goods at Wal-Mart (WMT) instead of having to rely on already overstretched food banks. That helps keep people working at Wal-Mart. If they spend the money on toilet paper, it helps keep people working at Kimberly-Clark (KMB) or Procter & Gamble (PG).

Those people who are kept working in turn go out and spend money and keep other people working. In fact, the non-partisan Congressional Budget Office (CBO) finds that, dollar for dollar, extended claims is among the most effective form of fiscal stimulus in keeping of creating jobs.

Continuing Claims Not a Long-Term Solution

On the other hand, we do not want to make extended unemployment insurance simply welfare by another name. It is far better — for both the people involved and the economy as a whole — to get people working again, rather than just collecting unemployment checks.

Collecting a check from the government does not help one’s self esteem. While out of work, skills deteriorate. The longer you are out of work, the lower your likely salary when you eventually do get a job. More importantly, time runs in only one direction, and the lost output from people sitting around out of work can never be recaptured. That output, and the potential wealth that it represented, is lost forever.

If the level of unemployment benefits is set too high, then there can be an disincentive to work. At the levels that most states provide, that is not likely a major problem. The vast majority of the unemployed really would prefer to be back at work, but the jobs simply are not there.

While benefits vary by state, in general, unemployment insurance pays about 60% of the income people were making before they lost their jobs, up to about a maximum of $400 a week. That should be plenty of incentive to return to a regular job if one is available. However, a program where extended benefits gradually diminish over time might be worth considering.

Furthermore, there is not always a good match between the skills required by a job opening and the skills that the unemployed have. For example, about a quarter of the jobs lost in this downturn have been from construction (since construction jobs turned down before overall employment peaked, it depends on when you start to measure job losses).

Someone can be a very good plumber, but that does not mean that you will be a good computer programmer. Just because one is good at pouring concrete does not mean that they would be qualified to become a nurse. Either we need programs to retrain people for the jobs that are available (but even those are in short supply) or we need programs that make use of their existing skills.

The nation’s infrastructure is in very poor shape, particularly its hidden infrastructure of water and sewer plants. Much of that infrastructure was put in place during the Great Depression and has far exceeded its original planned life span. Upgrading that infrastructure would be a way to put those people to work. However, to do so would mean more government spending at a time when deficits are already high and the public is very resistant to tax increases (which would not exactly help the economy in a deep recession, in any case).

Dirk van Dijk, CFA is the Chief Equity Strategist for With more than 25 years investment experience he has become a popular commentator appearing in the Wall Street Journal and on CNBC. Dirk is also the Editor in charge of the market beating Zacks Strategic Investor service.

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