Here's the difference between jobless claims and the unemployment rate

In the latest edition of Yahoo U, Yahoo Finance’s Brian Cheung joins the On The Move to break down the difference between jobless claims and the unemployment rate.

Video Transcript

JULIE HYMAN: We're watching stocks fall today. The S&P 500 down 1.8%, this after we got a March unemployment report that showed a loss of 701,000 jobs and an unemployment rate at 4.4%. This follows yesterday's weekly jobless claims number that showed filings of 6.6 million. So how are we to sort of regard these two reports, and how-- what they might tell us about each other?

Brian Cheung is joining us for this week's edition of Yahoo U to explain. Brian?

BRIAN CHEUNG: Well, Julie, class is in session-- virtually, of course. And today we're going to try to square up jobless claims versus the unemployment rate. And you'll notice that we've got a pretty startling number this morning. Right, 701,000 jobs lost in the month of March. But for those that were watching the news yesterday, you also had the other eye-popping number-- that's 6.6 million people applying for unemployment insurance.

Now how do you square those two things together? You kind of can't, because there's two reasons. First, the data was actually collected at different times. And secondly, they actually measure different things. So this is a little confusing, but I'll try to walk you through it with some slides here.

What I'm showing you right now is the jobless claims numbers. So as you'll recall, this is something that's reported by the Department of Labor. This actually comes every week-- whoops, here I've gone forward.

And what this actually shows you is to claim unemployment insurance, you have to be laid off from your job. So these are the figures that you're looking at right here. The first eye-popping number was from the weekend in March 21. Right, we got that two Thursdays ago. That was a record 3.3 million people asking their states for weekly unemployment insurance.

But for the week ended of March 28, we got that new number, right. That was yesterday-- 6.6 million people getting claims. That means in total, you had 10 million people, just over those two weeks, confirming that they had lost their jobs. But remember, you had to have had received a claim to be counted here. A lot of the people that were actually not able to get through the phone lines were not counted in those figures, meaning that there could be even more claims in the future weeks.

Now for today's job report, we did see that 701,000 job loss number. That was for the month of March. And the unemployment rate, as you'll recall, rose from 3.5% in the month of February to 4.4% in the month of March.

But what's important here is that while we call this a monthly jobs report, it's actually based on a survey that collects data as of March 12. And so we know that was well before a lot of the businesses across the country began shuttering, and people were ordered to stay at home. What's important though here, also, is that the unemployment rate has a quirk about it. It actually doesn't include people who are not actively searching for jobs right now.

And here is where we have to square the numbers with the jobless claims. So if you're one of the 10 million people who took UI, but you're looking for a job to get off of it, right, maybe one of those hundreds of thousands of people that are being employed at Amazon, or maybe you're going to take a job at the local grocery store where they need an extra pair of hands. You're counted in that 4.4% number that I just showed you. So you are what they call unemployed.

But if you took unemployment insurance and you're planning on sticking with that through the end of the virus, you're not going to be actively searching for a job. In this case, you're defined as marginally attached. So you're not looking for work, not working, but you do want a job at some point. In this case, you actually would not have been reflected in that 4.4% figure that I just showed you.

Now here's the problem, is that the line between these two things is really hard to distinguish, especially when things are accelerating as fast as they are. So if you work at a restaurant, or you work at a shop that's shuttered, you're deciding if you need to ride UI for a little while, or if you're going to try to look for a job right now. And the Bureau of Labor Statistics, which actually conducts these surveys, they say that there was actually a measurement conundrum in trying to figure this out. And they said with the inconsistency, the headline unemployment rate number could have actually have been as high as 5.4% instead of 4.4%.

Now the last thing I want to point out here is that this is the labor force participation rate. So this is something that I guess people-- it might offer a little bit more clarity, because it doesn't have as much noise. And you can see the drop-- it's a little small here, but drops from 63.4% to 62.7%.

This is a measure of the people who have a job divided by all the people who don't. And some of this is because of a demographic factor, like aging population, for example. It's just older people. But also, you can see that the drop is noticeable enough where you know this is from COVID-19.

Now imagine when the jobs report reflects the month of April, where we could see job losses in the millions, right? Because this was only affected by 701,000 job-- jobless people for the month of March. This would in theory depress the ratio of people that are working to levels that we haven't seen since the 1970s.

And that jobs report won't actually come until the last Friday of May, and that's five weeks from now. And what's important, though, is that stuff-- that's five weeks of those jobless claims data that we can get. So it's going to get a lot worse before it gets better. But important know the differences between jobless claims and unemployment data, for anyone that was just following. Julie?

JULIE HYMAN: And now we do, thanks to you. Brian Cheung, really appreciate it. This week's edition of Yahoo U.