Employment data inaccurate ?

There has been a growing gap between slow GDP growth in the Obama era (+1.5% average), and employment data that suggest normal economic growth (+3.0%).

Based on other indicators, such as labor force growth and slow productivity growth, the Real GDP numbers make sense ... but the employment data do not.   

The good news is that jobs growth and the unemployment rate are both lagging indicators that don't predict the start of a recession, so they are not that important.  

But the weekly initial jobless (unemployment compensation) claims had been a good coincident indicator.  

The bad news is employment data are among the most popular economic indicators, and have been unusually bullish.

I usually wait until monthly employment data are released to complete my EL newsletter!

    Data Collection Methodologies Keep Changing:

Reagan’s administration insisted on an adjustment for newly created businesses which resulted in the birth and death model adjustment. 

Clinton's administration insisted on redefining the workforce to exclude all but a small percentage of discouraged workers (people who said they wanted a job but didn't actively seek one in the past month). 

 -- This resulted in about 4 million unemployed people reclassified as long-term discouraged. 

Clinton also reduced the sample size of the household survey, excluding a disproportionate share of inner-city households who were less likely to hold jobs. 

George W. Bush’s administration introduced the probability-based sampling methodology which increased the birth and death adjustment figures.

The Bureau of Labor Statistics (BLS) may be failing to account for the rise in part-time and contract work.

       Current data problems:

-- Full-time jobs are being replaced by part-time positions, resulting in double counting of jobs by the Establishment Survey.

-- More people are joining the contingent workforce, so jobless claims are no longer a good economic indicator, because part-time and contract-based workers are most often ineligible for unemployment insurance. 

The number of jobs added to the economy each month comes from the Establishment Survey (aka "Payroll Survey"). 

The BLS sends out a survey to a sample of about 146,000 businesses.

By surveying just a small fraction of all US businesses, measurement errors around this survey are significant. 

The 90% confidence interval is +/- 120,000 jobs. 

In addition, there are data revisions up to a year later, that tend to be especially large in months just before and just after a recession starts. 

The main problem with this survey is that it may count one person with two part-time jobs as "two jobs". 

For example a laid-off manufacturing employee might need to work two part-time jobs. 

The Establishment Survey may see one lost manufacturing job, and two new jobs in services. 

Here is how the BLS treats multiple job holders:

     “Establishments report the number of persons on payroll during the pay period that includes the 12th of the month. A person working multiple jobs at different establishments is counted once at each establishment. A person working different jobs at the same business establishment is counted once.”

      Contingent Workers vs.  Full-time Workers:

Low Pay: 

Contingent workers have a median hourly pay around $13 

compared to $18 for full-time workers (38% lower pay).

Job Instability: 

28.5% of part-timers were laid off in the previous year 

compared to 8.2% for full-time employees.

Low Access to Medical Insurance: 

Only 18% of contingent workers had employer-provided 

health benefits compared to 56% of regular workers.

High Poverty Rates: 

33.1% of core contingent workers earn $20,000 or less per year, while only 10.8% of full-time workers do.

High Reliance on Public Assistance:

Part-time employees rely on welfare programs such as

the Supplemental Nutrition Assistance Program (aka food stamps).

   US Government Accountability Office (GAO) Survey

A 2010 report by the US GAO said contingent workers in the US economy were 37.1% of all employees, up from 32.4% in 2006.

The 4.7 percentage point increase translates to nine million workers shifting to part-time employment in just four years. 

(2010 was the last year the GAO conducted a survey on the contingent workforce, so there are no current data) 

         Harvard-Princeton study on employment

A new research paper by economists from Princeton and Harvard found that 94% of the jobs created in the current economic cycle were temporary positions. 

The study was by Lawrence Katz, a Harvard University professor and former chief economist at the US Department of Labor and Alan Krueger, a Princeton University professor and a former chairman of the White House Council of Economic Advisers.

They found that most of the jobs created in the Obama years were temporary positions -- more than 9 million out of the 10 million jobs created were part-time. 

     How the BLS Defines a Full-Time Job

The Establishment Survey does not distinguish between part-time and full-time employment, but the Household Survey does. 

The BLS claims there has been no significant increase in the contingent workforce, but they measure part-time employment based on this formula:

“Full time is 35 hours or more per week; 

part time is 1 to 34 hours per week.”

Anyone who works 35 or more hours per week, even if they have two or three part-time jobs that add up to 35 hours, is counted as full-time employee. 

      The Birth Death Model Adjustments

An adjustment for jobs created or lost by new business formations or bankruptcies each month.

It started during when the Reagan administration complained that BLS was undercounting the jobs he created. 

It used to be called the “bias adjustment factor.” 

This adjustment uses a model based on probability-based sampling methodology.

Before 2003 few jobs were added through the adjustment, despite the fact that new business formations were strong.

30% of jobs created since 2010, or 4.5 million out of 15 million jobs, were added via the birth / death adjustment. 

40% of the jobs added in 2016 came through the adjustment.

That's a HUGE adjustment when multiple studies reflect a consistent decline in new business formations. 

-- Self-employed persons as a percentage of the working age population are declining.

-- The number of jobs created by businesses less than one year old are also declining.

The BLS seems to be alone in claiming no deterioration of the US entrepreneurial environment and new business formations.

Employment by S&P 500 companies as a proxy:

Deutsche Bank compiled employment statistics from the S&P 500 index. 

These 500 companies employ 17% of the country’s workers. 

Employment growth in S&P 500 companies just turned negative for the first time since 2009.

   Unemployment Rate From the Household Survey. 

The BLS calls about 60,000 households,

and asks if any members have worked 

for at least 1 hour during the month 

or if they have been actively searching for a job. 

If any household members have worked 

for at least 1 hour they are classified as employed, 

if they have been actively searching for a job, 

they are classified as unemployed.

To be classified as actively seeking employment 

one must:

(1) Contact employers or employment agencies directly 

and have job interviews within the last 4 weeks;

(2) Submit resumes or fill out job applications 

within the last 4 weeks;

(3) Place or answer job ads within the last 4 weeks.

Some people who are looking for a job won't meet the criteria above, so will not be counted in the labor force, 

making the unemployment number too low. 

The criteria to be categorized as employed are too lax:

just one hour of paid work per month is sufficient. 

No signed work contract or any formal arrangement is required. 

Unemployed persons excluded from the official labor force would also be  excluded from the labor force participation rate. 

Currently about 63% of the working-age population is counted as being in the labor force, down from 67% a few years ago. 

Over the past decade this number has been steadily decreasing. 

It is back to its level in the 1970s when women were underrepresented in the labor force.

The current very low unemployment rate is at least partly explained by the low labor force participation rate.

The rise of part-time work arrangements has not been limited to the US. 

According to a study by McKinsey Global Institute between 20% and 30% of employees in Europe are contingency workers.

The BLS phones random households to estimate employment numbers that include the self-employes and differentiates between part-time and full-time jobs.

From a radio interview with the head of the BLS by RealClear Radio host Bill Frezza:

“In today’s computerized world why do sampling surveys at all, why not log on to the social security metrics and computers and ask them how many people they collected the FICA taxes from that month?”

Erica Groshen, Commissioner of the Bureau of Labor Statistics 

      [who answers with a chuckle]: 

“Actually, that information takes a long time to get from these administrative data sources.”

     Jobless Claims

Initial jobless claims are the number of people who are filing to receive unemployment insurance benefits, as reported weekly every Thursday by the US Department of Labor. 

This number includes only new filings --  people who have just lost their jobs. 

The number has been an important early-warning indicator – when it increases it portends trouble in the economy as layoffs surge.

Claims were recently the lowest since 1973, even though the US population has increased 50% since then.

As employees move to the “gig” economy with contingent work arrangements, fewer people are eligible for unemployment insurance.

Here is a list of factors that reduce initial jobless claims:

-- The economy has added mostly part-time jobs, and fewer workers are eligible for unemployment benefits.

-- Employees in contingent work arrangements tend to hold multiple jobs to pay their bills. 

-- Even if they lose one of their part-time positions, they often do not qualify for unemployment insurance.

-- Due to budget constraints many states have cut unemployment benefits, reducing the incentive to apply for them.

The low number of initial jobless claims may be a misleading indicator.

SUMMARY:

The jobs added through the birth and death model are hypothetical jobs.

No one knows how many of the BLS jobs were double and triple counted part-time positions. 

If General Motors lays off 1,000 full-time workers and they end up working two part-time jobs each, the BLS could report a net gain of 1,000 jobs. 

If those same workers lose their part-time jobs, they will not be eligible for unemployment insurance, and will not show up in the initial jobless claims report.