A Dispassionate Analysis of the Employment Situation by Matt Busigin

Overview

Hearing or reading about the state of the beleaguered labor market is impossible to avoid. The financial crisis began more than six years ago, and it has been even longer, since May 2008, from the last bottom in the unemployment rate (4.4%). In this piece, we take stock of the employment situation as it is right now, consider the trend it is following, estimate how long it may take to achieve full employment, and reflect on what may happen when we get there.

Household vs. establishment surveys

If you just look at the headline non-farm payroll changes over the past two months (75k and 113k, a slowdown from 273k published in November), you could conclude that the labor market is slowing once again. Reality is more nuanced, and there is additional trouble in developing conclusions based on data that are highly revised multiple times up to a year after the initial publication (and long after most people actually care). Regardless, those are the data we have now, so let’s analyze the data at face value.

There are in fact two measurements taken by the BLS (US Bureau of Labor Statistics) every month on the size and change in employment: the establishment survey, typically quoted as the “headline number,” which samples about 145,000 businesses per month about their employees, and the household survey, which samples about 60,000 households about their employment. BLS publishes a great guide to its methodology.

Employment
Figure 1: Last 3 months of Establishment Survey (blue) and Household Survey (red) estimates of m/m payroll change (k)

The household survey (see Figure 1 above, red) has been more emphatic in the job growth picture than the establishment survey (blue). This is actually not abnormal. On a month-to-month basis, the correlation between both surveys is only 47%. The household survey is historically much more (37%) volatile, but over a full year, the two surveys converge with a correlation of 92% (see Figure 2 below).

Figure 2: Scatter-plot of m/m and y/y change in payrolls from establishment and household surveys

Perhaps most importantly, the household survey has led when the economy has been accelerating during an economic turning point in the past four recoveries (see Figure 3 below).

Figure 3: Household (black) and establishment (orange) survey y/y change in payrolls (k) from the past 4 recoveries

The establishment survey leads the household survey down before recessions, but the enormity of evidence against a downturn (leading indicators, fixed investment, asset prices) makes that explanation highly unlikely. It could thus be assumed that the establishment survey may play catch-up to the household survey.

What are households saying?

Although most of the focus on the employment situation is the headline numbers, unemployment rate and change in payrolls, it is composed of thousands of different series, covering employment, unemployment, race, age, gender, educational attainment, sectors/industries, hours, and pay. Change in these series that is not reflected in the headline numbers is often referred to as the internals of the report. They serve to tell us how the composition of the labor market is changing.

Figure 4: Select measures from The Employment Situation from the household survey

The internals are consistent with the household survey, which has averaged 580k payrolls per month over the past three months. Starting with the most common criticism of employment data, the labor force actually grew by 523k, and the long-derided participation rate increased by 0.3%. The unemployment rate dropped across all education levels, but the most significant improvement happened for those holding high school diplomas, where the unemployment rate dropped a staggering –0.6% to 6.5%, an improvement bested only three times in the history of that series. [1] Perhaps the biggest cause for optimism is the sharp drop in persons employed part-time for economic reasons. This category includes both “slack work or business conditions” as well as “could only find part-time work.” The number of people in this category dropped a staggering 514k. This improvement is in the top 96% of all readings going back to the series start in 1955. [2] “U6,” the broadest measurement of unemployment and underemployment, dove 0.4% to 12.7%.

The only major internals that did not improve were race related. The white unemployment rate dropped 0.2% to 5.7%, whereas for blacks or African Americans, it edged up the same measure to 12.1%. Asians, who have had the lowest unemployment rate of all races, saw a jump of 0.7% to 4.8%. The long-term trend of unemployment in all these groups is down, so it is likely that this is month-to-month noise that will resolve itself positively. [3]

All these numbers are subject to large month-to-month variation. What is clear is that the establishment survey payroll number is not consistent with much of the meat of the much broader Employment Situation report. The leading nature of the household survey in expansions provides some indication that the good news it contains will spread to the establishment survey.

Is job growth keeping up with population growth?

Many have noted that actual recovery must exceed population growth to represent real recovery, and once the output gap is closed, true growth must keep up with population growth. This is not precisely true. Although population is slated to grow by somewhere around 22 million over the next decade, which would represent 183k per month, most of this won’t be in the working-age population. Furthermore, the largest age group of workers (Baby Boomers) will be aging out of the labor force. From 2012 to 2024, the BLS estimates that the labor force will grow 10 million, less than half of the population growth. Consequently, it is more appropriate to use labor force growth as the break-even measurement of employment, and it works out to 67k per month. [4]

Figure 5: BLS projections for population and labor force growth

Although unemployment is above the natural rate, we need more than population growth to close the gap, and we are getting it. Once the gap is closed, however, the rate of job increases will be much smaller than it has been in the past purely on the basis of demographics.

How tight is the labor market?

The natural rate of unemployment is typically defined as its theoretical level if the economy were running at full potential output. That doesn’t mean that there is no unemployment. Too little unemployment would mean inadequate liquidity in the labor markets, which would increase frictions to organizing people in jobs in the optimal manner for output. The sibling to the natural rate is the non-accelerating inflation rate of unemployment (NAIRU), which is the estimate of the lowest unemployment rate that would not be consistent with an accelerated rate of inflation. It seems likely at this juncture that the natural rate is lower than the non-accelerating rate. The consequence of this is that we could achieve higher real growth rates with higher inflation rates.

When we discuss unemployment in the context of labor market tightness, there is both a normative (moral judgment of what should be) as well as a positive (study of what is) aspect. The Federal Reserve has seemingly explicitly adopted the inflation target as a higher priority than the unemployment rate

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