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.

Posted by Jim Newton on Dec 7 2011. You can follow any responses to this entry through the RSS Feed. Comments can be made below.