Weekly American jobless claims have fallen from 345,000 to 310,000 as the U.S labour market is recovering. This recovery comes after a long and turbulent period as during the COVID-19 pandemic, many Americans lost their jobs with unemployment peaking at a high of 11.6% in April 2020.
The reason for these job losses is primarily attributed to the loss of consumer confidence during the pandemic as the threat surrounding COVID-19 made many consumers uncertain about their future.
Therefore, because there is high uncertainty, U.S consumers did not feel comfortable spending their cash as turbulent labour markets and rising unemployment makes individuals feel like their jobs are at risk. Consequently, individuals who feel like they have a higher chance of losing their jobs save more as they focus their efforts on creating an emergency fund just in case everything goes wrong.
Hence, as more consumers scramble to save during the pandemic, aggregate demand falls as the marginal propensity to save within the economy rises.
This fall in aggregate demand leads to a reduction in the demand for goods and services within businesses, and, once this occurs, businesses see lower profits as well as cash flow.
The businesses which have been most impacted by this are cash-based firms such as the ones on high streets. High-street clothing giants such as Topshop and Debenhams have closed their doors as they have been bought out by the online retailer known as ASOS.
Therefore, during recessionary periods, businesses, which see a reduction in demand, have to cut back on their factor inputs, and, some may shut altogether.
What this leads to is a rise in underemployment in the economy as firms who are looking to survive cut costs by decreasing the hours of their employees as well as a rise in unemployment as firms that collapse is forced to lay off all of their workers.
Consequently, this is the chain of events that occurred earlier during the American COVID-19 pandemic as a shortfall in consumption in the economy stifled business activity, thus contributing to a rising unemployment rate.
However, the recent success of the American vaccine rollout combined with the fact that many consumers have accustomed themselves to the current conditions means that consumer confidence is rising once again.
This means that, as consumer confidence rises, consumer spending, a component of aggregate demand, also increases.
Therefore, this leads to an overall boost in aggregate demand.
Hence, this is a reversal of the previous trend, aggregate demand rises, firms see a rise in demand, thus meaning they see a rise in the price of their products.
Consequently, the price mechanism begins to incentivise and signal producers to increase their factor inputs to upscale output.
One of these primary inputs is labour, hence, because firms require more labour, vacancies rise and those who became unemployed due to cyclical unemployment and who are looking for work can now find work, as evidenced by a decreasing unemployment rate.
At the same time, a decreasing unemployment rate reduces the number of people on weekly jobless claims, thus illustrating why the drop from 345,000 to 310,000 has occurred.
Despite this, there is still an estimated 11.93 million Americans on benefit payments. Gus Faucher, Chief Economist at PNC Financial in Pittsburgh, Pennsylvania had stated this:
“That's going to weigh on growth, but the consumer spending will still increase, just at a somewhat weaker pace."
However, the number of Americans filing new claims for jobless benefits has fallen to the lowest level in nearly 18 months.
This means that, as the amount of individuals on benefits reduces, the American government will be able to allocate more resources towards repaying their national debt, which currently sits at 107.6% of GDP, or, $26.51 trillion.
Therefore, this will help ease the U.S national debt, helping to minimise the opportunity cost associated with debt repayments.
This will assist the U.S in reducing its debt to GDP ratio to a more sustainable level, enabling the nation to borrow more for a future recession.
Written by Hubert Kucharski
Research compiled by Jonas Theaker