|
A Problem with Payrolls? by Tim Kane, Ph.D., and Rea HedermanWebMemo #550
|
Posted on 08/07/2004 11:12:19 AM PDT by unspun
|
A Problem with Payrolls? by Tim Kane, Ph.D., and Rea HedermanWebMemo #550
|
Here. We. Go. Again. The Department of Labor's July Employment Situation Report is out this morning, and the news is good. And not good. The unemployment rate stands at 5.5 percent in July, compared with 6.3 percent a year ago and an average of 5.8 percent in the 1990s. Fundamentally, the employment situation in America is solid, but the sluggishness of payroll job growth is stunning and out of line with a host of positive indicators. The strength of today?s labor market is yet another sign that the President?s 2001 and 2003 tax cuts were effective policies and must be extended.
Employment growth is not a problem in America, but the establishment survey of payrolls has a clear problem. According to the official statement from the commissioner of the Bureau of Labor Statistics, which publishes the monthly figures, ?As measured by the household survey, employment rose by 629,000 over the month, compared with a change of 32,000, as measured by the establishment survey.? Since 1948, there have been 62 instances where household data reported 500,000 new jobs or more, coinciding with a payroll average of 240,000. July?s net gain in payroll jobs marks the 11th straight month of rising payroll employment but still came in well below analysts' expectation of 247,000. What's going on?
The key, once again, is the difference between the two employment surveys. The payroll survey measures employment at established firms but does not count self-employed consultants, contractors, farmers, and the like. Worse, the payroll survey is highly susceptible to changing rates of turnover. When job-changing dips due to higher uncertainty, the payroll survey artificially deflates. So the gap between the two surveys, which had narrowed a bit in recent months, is now at 3 million (see Chart 1). Since March 2001, the payroll survey suggests there are 1.24 million fewer jobs, in contrast to the household survey?s measure of 1.81 million more working Americans?more than ever before.
And today of all days, the Labor Department published its very first, preliminary assessment of the impact of job-changing on the payroll survey (see "Effects of Job Changing on Payroll Survey Employment Trends"). It acknowledges the Heritage Foundation's analysis from March 2004 (see ?Diverging Employment Data: A Critical View of the Payroll Survey? by Tim Kane, Ph.D.) that worker turnover has a significant effect on the payroll survey, inflating the total count by over a million jobs, but also by over-emphasizing job losses during business cycles when turnover declines. Since March 2001, BLS estimates that the "job-changing effect" has led to an overstatement of 251,000 job losses in currently published data.
Which Survey to Believe?
It is important to understand the methodological problems of the payroll survey, but it is more important still to consider both surveys in light of all the other labor market indicators, which are generally positive. The ISM manufacturing and non-manufacturing employment indices, for example, have been at 50 or above?indicating improvement?for 14 and 10 straight months respectively, including several all-time highs. Consumer confidence is rising.
One of the best independent indicators is the weekly report of initial jobless claims, which have been dropping for the past twelve months and are now steady in the range of 340,000 a week. Levels below 400,000 are widely perceived to reflect a healthy, growing workforce. Further, real GDP growth averaged 3.75 percent annually during the first half of 2004, a period of strong job creation.
The last few months have brought needed relief to long-term unemployed workers. The number of long-term unemployed has declined by over 300,000 workers since March (see Chart 2). In July alone, the number of workers unemployed for more than 27 weeks declined by almost 100,000. Workers who have been unemployed for less than 5 weeks have grown as a percentage of the unemployed.
Furthermore, the length of unemployment spells dropped sharply in July from 10.8 weeks in June to 8.9 weeks. And the average length of unemployment dropped from 19.9 weeks in June to 18.6 weeks because of the decline in long-term unemployed workers. It is good news for unemployed workers that the duration of the period of unemployment has declined since the summer of 2003.
Summary
Today?s employment report is significant for two reasons. First, it underscores the positive trends in the economy with the 11th consecutive month of improvement. Second, it is the largest divergence in measures of total employment between the two BLS surveys in years, which means that economists must finally reckon with the problems of the payroll survey. The household survey has been under attack by pessimists for a variety of reasons, but today?s report shows that it to be more in line with other indicators of a strengthening economy. Jobless claims are down, unemployment durations are falling, and average pay is rising.
Finally, it is important to remember what the report does not show. The President?s economic policies are keeping the unemployment rate low, and predictions of rising claims for unemployment insurance have not materialized. Maintaining free trade in the face of the outsourcing scare has not resulted in lower worker earnings or weak employment, but the opposite. Most importantly, the tax cuts of 2003 have been followed by 11 straight months of payroll job growth and millions of entrants to the labor force.
Tim Kane, Ph.D., is Research Fellow in Macroeconomics and Rea Hederman is a Senior Policy Analyst, in the Center for Data Analysis at The Heritage Foundation.
See charts on Heritage Foundation site.
I fear we can't beat the press..
The bushies need to be out there pushing this info more..
According to the payroll survey, I am unemployed.
Yet, I work as a contractor making the highest salary I have ever made in my career.
Finally, some sanity!
I got a great idea.
President Bush has to show up at the debates with some charts and graphs, ala Perot, to explain this to the people.
.
.
.
</slap me down>
.
Agreed...In my two businesses, which employ a whopping total of six people, we're not going to be included in that payroll survey. I think everyone should read Free Agent Nation, by Daniel Pink, who was, ironically, Al Gore's speech writer. In California, IIRC, it's about 30% of people that are actually "employed" in the old sense of the word. Others are self-employed, are contractors, or other similar arrangment.
The real bummer is that the markets react to the payroll survey, and when people see the Dow and Nasdaq tumbling, panic sets in. I had a talk with my broker yesterday asking why analysts aren't able to think clearly about this stuff. I guess they're stuck in the old way of thinking.
ditto
The DOW also reacts to the price of oil. Maybe it will come down soon. But as for your business, just WHY are you not included in the payroll survey? What is it that distinguishes a small businees like yours from a business which is included?
Yes! He needs kudlow and elaine and other pushing this like mad on the new media.
I had even emailed Drudge on the household # and the 5.5% which even he, Drudge, did not mention.
size matters.....
I believe it's some type of set survey of "established" employers. The household survey just seems to be more indicative of the "new" economony (small businesses, self-employed, contractors, and other assorted "free agents) than the payroll survey. This is why we keep seeing this huge discrepancy, and I think it will continue. I'm not sure how long the BLS is going to continue to analyze things this way.
Here's a quote from the BLS site:
"Data based on establishment records are complied each month from mail questionnaires and telephone interviews by the Bureau of Labor Statistics, in cooperation with State agencies. The Current Employment Statistics (CES) survey is designed to provide industry information on nonfarm wage and salary employment, average weekly hours, average hourly earnings, and average weekly earnings for the Nation, States, and metropolitan areas. The employment, hours, and earnings data are based on payroll reports from a sample of over 390,000 establishments employing over 47 million nonfarm wage and salary workers, full or part time, who receive pay during the payroll period which includes the 12th of the month. The household and establishment data complement one another, each providing significant types of information that the other cannot suitably supply. Population characteristics, for example, are obtained only from the household survey, whereas detailed industrial classifications are much more reliably derived from establishment reports."
The other thing is even if we WERE surveyed, if we use contractors or temp agencies, or whatever, which MANY small businesses do (remember how expensive it is to employ people), we don't report them as employees, but the household survey likely would show the person we use as employed, because they'll say they do have a job.
Well, let your fear give you some adrenalin and get to work. We don't have to beat the press overall --we just have to get enough reality out, to get enough voters to vote the right way. Remember 2000. (PA should be much more Bush-oriented, this election, with greater scrutiny over Philadelphia voter fraud! - I expect PA to be a Bush state.... if you're doing your job. ;-) Get a list of emails (and faxes) together, of all the media outlets, conservative groups, and the elected officials in your community, then your local area, then the state....!
BTTT
Herritage foundation to me is just playing mental gymnastics. For one the household survey is far smaller, for two, there have been far too many "adjustments" in the household survey since the early 90s to make the numbers mean anything. The truth is many people have dropped out of the workforce and many have been forced to become self employed in positions that they make far less money in for no other options available.
Part of the reason for this is that small businesses are becoming the main employers in the country, and not the Fortune 500 companies. The rising cost of health care, SSI, unemployment insurance, etc., is a HUGE burden on small businesses, and many just need to use contractors to expand their businesses. Believe me, with somewhere around $700 per month for healthcare for each employee's family, 15% SSI, unemployment, etc., you wouldn't believe the burdens we have that keep us from employing more people.
I think the true employment picture is somewhere between these two numbers, but we also need to look at (and hopefully fix) the problems that are leading to the employment situation. For example, why do companies outsource? It's not just because the salaries are cheaper...companies are saving money because the administration of benefits, taxes, etc. completely falls on the outsourcing agencies, reducing the cost even further to the company who is outsourcing.
More resources should be put into collecting the HH thats.
The HH survey is a better measure of actual employment because it asks the direct source of the information.
Contract employment means you can save 40K a year in your 401(k) and write of other expenses. It essentially amounts to a pay increase, since the employer does not pay your health care or FICA taxes...
Dont forget to set up your safe harbor 401(k) or a SEP...
The problem with the household survey numbers are too many adjustments are put into them, especially within the last decade. Those whose unemployment has been exhusted are no longer considerd unemployed, those who take part in special retraining programs are no longer considerd unemployed, those who have to take assitence(welfare) are no longer considred unemployed, those who are forced to go back to school for no other option avilable(usually with govrenment assistence) are no longer considered unemployed. Not to mention the seasonal adjustments that are made as well, especially those made to adjust out plant retooling efforts in the summer.
Again, the Herritage foundation to me represents the WSJ style Conservatism, meaning money before peopple, and is willing to apply any form of mental gymnastics to bury the truth.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.
printer-friendly format