Labor markets improving, but not that much
Every month financial market participants, government policymakers, and business people try to sort through all of the latest estimates of economic activity. Without a doubt, the figures that get the most attention are those related to employment and unemployment. Nothing seems to represent so completely and thoroughly the opportunities — or lack thereof — that people are facing in their everyday lives. These labor market developments, in turn, set the backdrop against which most other major domestic economic activity seems to flow.
As discussed in past columns, the U.S. government estimates labor market developments each month via two surveys; one of households (that would be all of us) and one of employers. While they are meant to estimate much the same thing, the survey of 60,000 households is utilized largely to produce figures on how many people are in the labor force (employed or unemployed) and the all-important unemployment rate. The payroll survey of some 400,000 individual non-agricultural employer locations around the country is meant to provide some clue as to net job creation and the sectors of the economy that are providing new job opportunities.
While the two surveys can see some modest differences in what they suggest from time-to– time, they tend to track one another reasonably well, particularly in terms of both the direction and magnitude of changes in the number of people employed. Again, they tend to track one another well most of the time … but for whatever reason now is quite obviously not “most of the time.”
Last Friday the estimates for the month of November were released, and according to one of the monthly reports, labor markets seemed to show a vast improvement over results throughout most of 2011. During November the nation’s unemployment rate plummeted by a huge amount, dropping from 9.0 percent in October to just 8.6 percent in November. As well, according to the household survey, the number of Americans employed rose by a very strong 278,000. All-in-all it was (seemingly) an outstanding labor market report.
Unfortunately, a more thorough examination of the figures may suggest that the gains were not nearly as effervescent as the unemployment rate and the number of employed estimated by the household survey indicate at first blush.
In the case of the huge plunge in the unemployment rate, it seemed to be partially due to a resurgence of the “discouraged worker” effect (or some variation thereof), given a drop of nearly 600,000 people from those labeled by the government as “unemployed”. So, how do the number of people unemployed drop by 594,000 while the number of employed increases by fewer than half that amount at 278,000? Simple. Some 315,000 people (in net terms) dropped out of the labor force; suggesting that the lack of job availability caused nearly one-third of a million people to throw up their hands in frustration and simply walk away from attempting to find gainful employment. Due to this combination of changes, the unemployment rate fell significantly even as Americans gave up looking for work. But this cautionary note in the household survey also extends to the payroll survey. While the household survey estimates 278,000 net jobs were created, the payroll survey — generally considered to be a better estimator of job creation — rose by a far more modest 120,000 net new payroll jobs in November. While such a large divergence happens on occasion, over a period of many months, the magnitude of changes tend to track one another well.
However, when examining the movement of the two estimates of net job creation over the past four months, the differences are disturbingly large. During the latest four reported months — August through November — the average growth in non-agricultural employment according to the payroll survey is a respectable but modest 133,500 per month. In contrast, the household survey estimates that total employment levels jumped by more than two times that average per month at 321,000. Needless to say, this difference is quite sizeable and suggests a very different storyline about developments in our nation’s labor markets.
While only time will tell which is more accurate, the level of economic activity as measured by a variety of other indicators (consumer spending, savings, wage rates, labor productivity movements, etc.) seem to conform more fully to the payroll (employer survey) estimates. If correct, this could suggest that in the next few months a reversal of the highly favorable November unemployment rate may take place despite modestly improving U.S. labor markets.
Dr. James Newton serves as Chief Economic Advisor to Commerce National Bank and is an auxiliary faculty member in economics and statistics at OSU-Marion and OSU-Newark. Dr. Newton’s views do not necessarily reflect those of Commerce National Bank or OSU-Marion/Newark.