QandO

August 26, 2004

The Job Picture gets muddier
Posted by McQ

There's been discussion and debate for quite some time as to whether the BLS payroll survey or the Household Survey more accurately reflect job growth. To this point, most have felt it was the payroll survey. But an op/ed in USA Today says, "hold on".

The U.S. Bureau of Labor Statistics (BLS) recently snuck out a telling confession beneath everyone's radar: Its flagship payroll survey is likely undercounting hundreds of thousands of jobs.

The article, by Timothy Kane and Andrew Grossman of the Heritage Foundation is worth the read. They note that when looking at the economy, it seems everything adds up - except the payroll survey:

In his July 20 testimony to Congress, Greenspan cited measures from the payroll and household surveys. Then the Federal Reserve, led by Greenspan, voted unanimously to raise interest rates. It said the economy is "poised to resume a stronger pace of expansion" and noted that labor-market conditions continue to improve. It's no secret which survey would lead to that conclusion.

The Fed's actions helped everyone, including Wall Street, remember the good news. Claims for unemployment benefits, for example, are 10% below their 30-year average, while the unemployment rate has fallen to its lowest level since 2001. Best of all, the household survey showed a gain of more than half a million jobs in July alone.

Everything adds up — except the payroll survey.

So, per these guys, it appears that there have indeed been more jobs created than have been counted in the payroll survey. If we're going to judge the health and stability of our economy with certain statistics, it would help if they're accurate.

They also mention the following:

The definition of a job has changed, but the payroll survey hasn't. It is a huge mistake to focus on an illusory problem of economic weakness. Instead, policymakers should update business laws to reflect the new reality — the rapid pace of change in the workplace.

Time to take a good hard look at the BLS payroll survey.

One last thing mentioned in this article that caught my eye:

American workers need health care that's portable between jobs. They need pensions and 401(k) rules that are as flexible to move between employers as they are. What they don't need is more hot air about flawed statistics.

Want health care reform? There it is. Its as easy as making insurance portable. It should be the job and choice of the employee as to which insurance pool he chooses to join and he or she should also have the ability to change whenever their needs change. Make health insurance portable and you eliminate "preexisting conditions" and periods of no coverage. Institute competition for clients among insurers and see pricing adjust.

UPDATE (Dale):

Andrew Grossman ws kind enough to provide a direct link to Mr. Kane's paper, which the article references.

Now, I generally don't refer to publications put out by politically oriented think tanks. Without casting aspersions on anyone, the simple fact is that the job of a conservative or liberal think tank is to provide ideologically sound interpretations of data for use by their political allies. I prefer to refer, therefore, solely to peer-reviewed work from the academic world, or from government sources like the generally quite good working papers released by the economic staffs of the various Federal Reserve Banks and the like. Once you quote Heritage on policy X, someone invariably points to an opposing paper put out by some place like the Progressive Policy Institute, which doesn't get you very far.

No doubt, someone will point out how convenient that Heritage has published a paper that says the jobs picture is better than the government says it is, just as we are moving into the fall campaign season.

With that caveat noted, however, I think Mr. Kane's work deserves a close look at the very least. For the last year or so, we've seen very large discrepancies between the number of jobs the payroll survey is indicating, and the number of people who are telling us, via the household survey, that they are gainfully employed. So far, no one has come up with any convincing rationale that allows us to try and rectify this obvious discrepancy. Even the BLS is stumped.

The BLS reviewed the disparity in a major study for its October 2003 Advisory Committee, concluding, "To date, BLS has not been able to pinpoint a source or sources of these differing trends in employment growth." More recently, the February 2004 Economic Report of the President noted that "the explanation for why these two surveys' results have diverged so markedly over the last few years, and what this might indicate about the economic recovery, remains a puzzle."

My own, tenative conclusion, and the one I've been touting for several months, has been that the rise in self-employment is being missed by the payroll survey. Mr. Kane appears to agree.

Self-employment is a different matter, and the latest statement by the BLS commissioner confirms the appearance of a new class of contractors. The evolution of the workforce--specifically, the demographic emergence of consultants and contractors who do not consider themselves self-employed--is a likely wedge between the surveys. Self-employment has grown by over 600,000 in two years, and misidentification by the LLC and consulting workforce implies a much higher number.

The conventional wisdom, of course, is that the establishment survey is more precise than the household survey, for a number of statistical and practical reasons. But, that only remains true as long as the composition of the workforce doesn't change radically. A shift from direct employment, to employment as a contractor or an LLC may not seem like self-employment to the worker, but that is, in fact what it is. So, if there has been a workforce shift towards contract work, the payroll survey, no matter how accurate it is methodologically, will still be wrong, simply because it can't record what it doesn't measure.

I'm loathe, however, to place a lot of reliance on the household survey in terms of taking up the slack, because there's a lot the household survey doesn't measure, too. Bob may say he is employed full-time, but, just because he counts, say, selling cocaine as a full-time job doesn't mean that we should count it as such.

So, I doubt the employment picture is quite as good as the household survey indicates, but, I doubt it's as low as the establishment survey says either.

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