The "job growth" puzzle clarified (I hope)

Wednesday, January 10, 2007 at 04:55 PM

If you're like me (my regrets in advance), you get a funny feeling in the pit of your stomach when the talking heads start talking about the "job growth" statistics. I think there's a good reason for that funny feeling.

The government proudly announced that there were 167,000 new jobs created during December, 2006.  The White House pitched it as yet another bright & prosperous month in a whole slew of bright & prosperous months.  The media talking heads pretty much passed that really neutral characterization on to their listeners & viewers.  Print media also pretty much fell in line.

So why, then, the uneasy feeling in the pit of the stomach?  Isn't 167,000 new jobs in a single month something to celebrate?

Well, maybe yes, and maybe no.  In fact, no seems more likely than yes.

Where the jobs are
And that's even if you're one of the people with the new job, because the "new" jobs appearing in this country almost always pay less and provide fewer benefits than the "old" jobs that are so rapidly disappearing.

If you don't believe me, take a closer look at the fields that provided most of the "new" jobs according to the December jobs report (in thousands of new jobs):

Health care: 31.3

Accommodations and food services: 27.2

Government: 17.0

Temporary help services: 14.6

Services to buildings and dwellings: 13.0

Finance and insurance: 9.7

Now take a look at some of the fields that lost the most jobs (in thousands of jobs lost):

Manufacturing: -12.0

Construction:   -3.0

And note that for both manufacturing and construction, this marks an improvement over the prior few months.  In manufacturing, the average job loss for the 3 prior months was 23.3; for construction, the average job loss for the 3 prior months was 18.0.

Odd how the biggest job gains were in government (explain that you privatizing free marketeer zealots), and in accommodations and food service.  Can you say, "want to biggie size that?"

Even odder?  Something called "the ADP employment report" issued just a few days before the government's jobs report "showed a 40,000 decline in private-sector payrolls."

The increasing confusion over how many jobs we need to "stay even"

You also can't tell if 167,000 new jobs is good without knowing how many new jobs we need to stay even: how many new jobs do we need to absorb the new people coming into the labor force?  Creating 250,000 new jobs wouldn't be so hot if 275,000 new people entered the work force during that time.

Which, America being America, and politicians being politicians, is not easy to figure out, and getting harder.  First you obviously have to have a pretty good estimate of how many new people enter the labor force in an average month.

For quite some time, and as recently as the last couple of years, labor analysts, such as the chief economist at Wells Fargo in Minneapolis estimated that we need 150,000 to 200,000 new jobs every month just to soak up new workers.

Paul Krugman estimated recently that we need 140,000 new jobs monthly to soak up new workers.  And now you find a lot of sources, including the White House, saying that we only need 110,000 new jobs each month for that purpose.

What's going on?  I can't speak for the 150,000 to 200,000 estimate, but I can tell you where Krugman's 140,000 and the White House's 110,000 come form.

Krugman simply looked to the government's own population growth figures to compute the likely annual growth and divided that by 12.  It appears that the 110,000 per month needed to absorb new labor market entrants comes from--surprise!--a White House source.  In Brad DeLong's blog, DeLong writes:

the Bush Administration in its 2004 Economic Report of the President did the same calculation as Krugman... For example, if the labor force is growing at the same rate as the population (about 1 percent per year), employment would have to rise 110,000 a month just to keep the unemployment rate stable, and larger job gains would be necessary (and are expected) to induce a downward trend in the unemployment rate...

DeLong then notes that:

the Bush Administration assumed 1% per year as the rate of adult non-elderly population growth, and hence concluded that nonfarm payroll employment had to grow at 1/12 of a percent per month--110,000, that is--in order to keep labor market conditions stable. But growth is more like 1.25% per year. With payroll employment of 130 million, that's Krugman's number of about 140K per month.

The government keeps arguing that it's population growth estimate is accurate.  For example, we have this from a speech by a Federal Reserve Board Governor:

Similarly, changes in the expected growth rate of the labor force affect our interpretation of the monthly employment data.  If the labor force participation rate remains at its current level, then what might be thought of as the "equilibrium" growth rate of payroll employment--that is, the increase consistent with a stable unemployment rate--would be about 140,000 per month.  However, if the labor force participation rate instead declines 0.2 percentage point over the next year, as suggested by the Fed's staff research, then the comparable equilibrium payroll employment growth would be closer to 110,000 per month.

Who's right? Who knows?  But I do find it funny in the nonhumorous sense that the government finds a reason to lower the population growth estimate, hence the estimate of how many jobs we need to stay even, just as economic commentators have been taking the current administration to task for trumpeting its supposed job creation successes based on numbers that far too often are too low to absorb all new workers, let alone bring some long term unemployed back into the labor force.

And, needless to say, even the 140,000 figure assumes that the 1.25% annual growth rate of the population is accurate, i.e., that it accounts for illegal immigration.  There are lots of reasons to doubt that, if you believe any of the numbers being thrown around about how many illegal immigrants are entering the country annually.

The "not in the labor force" game
I've written about this before, but it needs to be repeated often (and loudly): the reason that "unemployment" is so low is that the government defines "unemployed" in a way that excludes all people who don't have jobs but who are not "actively looking" for a job, with the latter quoted phrase defined very strictly.  If you have no job, want a job, and look in the want ads and online job banks, you are not unemployed, you are out of the labor force.

And while we're at it, let's talk about the effect of the wave of "downsizings" by the major American corporations.  Many of these downsizings involve early retirement, either through a specific severance plan geared to retirement, or through offering a severance package that allows some older, better off workers to cease working after their separation from the company.  In eaither case, if you are "retired" in your own mind, then you are not activively looking for work.  And if you are not activiely looking for work, you are (in the eyes of the Bureau of Labor Statistics) "out of the labor force," NOT "unemployed."  Removing people from the labor force, of course, has the effect of lowering the unemployment level, not increasing it.

The net effect of these subtleties and shifting estimates?  The government is making it just as hard as it can for you to see through the public pronouncements of prosperity and job creation.  And if they're doing that, it's a safe bet that there's a reason.  Which means that we all have to work even harder to find out what's going on.