Legitimate Reasons To Question September’s BLS Household Survey
As my posts yesterday (see here and here) should make clear, I tend to agree with Steven Taylor regarding the absurdity of the reaction to yesterday’s jobs report from many on the right. The idea that the numbers were consciously manipulated is, quite simply, absurd and it betrays the kind of conspiracy theory mindset best left to the people who think that there are aliens being kept at Area 51 and that Elvis and JFK are running a diner in Montana. The fact that it’s being pushed by people like Jack Welch, the former CEO of one of America’s most prestigious corporations, is all the more troubling. Say what you will about Welch, but he’s no Donald Trump, and I’m not sure whether or not he simply tweeted something without thinking (believe me, it happens) or whether he actually believes that the Obama campaign is manipulating economic data. On the other hand, I’m not at all surprised to see people like Allen West pushing this theory, his time in Congress to date has not exactly been auspicious on a number of counts and he seems to attract most of his support from the most radical wings of the Tea Party movement.
All of that said, though, that doesn’t mean that there aren’t legitimate reasons to question some of the numbers that we get from the Bureau of Labor Statistics. As I noted in my posts yesterday, there are actually two completely separate surveys that make up the jobs report that gets released every month from the BLS. As Harvard Economics Professor Greg Mankiw explains, there are issues with both surveys that need to be taken into account:
One might expect these two measures of employment to be identical, but that is not the case. Although they are positively correlated, the two measures can diverge, especially over short periods of time. A particularly large divergence occurred in the early 2000s, as the economy recovered from the recession of 2001. From November 2001 to August 2003, the establishment survey showed a decline in employment of 1.0 million, while the household survey showed an increase of 1.4 million. Some commentators said the economy was experiencing a “jobless recovery,” but this description applied only to the establishment data, not to the household data.Why might these two measures of employment diverge? Part of the explanation is that the surveys measure different things. For example, a person who runs his or her own business is self-employed. The household survey counts that person as working, whereas the establishment survey does not because that person does not show up on any firm’s payroll. As another example, a person who holds two jobs is counted as one employed person in the household survey but is counted twice in the establishment survey because that person would show up on the payroll of two firms.
Another part of the explanation for the divergence is that surveys are imperfect. For example, when new firms start up, it may take some time before those firms are included in the establishment survey. The BLS tries to estimate employment at start-ups, but the model it uses to produce these estimates is one possible source of error. A different problem arises from how the household survey extrapolates employment among the surveyed households to the entire population. If the BLS uses incorrect estimates of the size of the population, these errors will be reflected in its estimates of household employment. One possible source of incorrect population estimates is changes in the rate of immigration, both legal and illegal.
More important than the specifics of these surveys or this particular episode when they diverged is the broader lesson: all economic statistics are imperfect. Although they contain valuable information about what is happening in the economy, each one should be interpreted with a healthy dose of caution and a bit of skepticism.
That last point is an important one, I think. Much like polls are merely a snapshot in time and any individual poll can be subject to any number of variables that could turn a reliable poll in to an outlier, the twin employment surveys can be flawed for one reason or another in particular months.This is one of the reasons that the BLS routinely revises it’s figures for at least two months after making the initial report. So, to some extent, we shouldn’t put too much import on a single month’s report, especially if it is inconsistent with other, more reliable, economic statistics.
All of this brings up the question of just how reliable some of our economic statistics actually are. For example, for years economists have been criticizing the model that the Commerce Department uses to calculate the Consumer Price Index, arguing that it doesn’t reflect reality anymore largely because it’s based on a model developed decades ago that doesn’t reflect the budget of an average family in the 21st Century an that it doesn’t account for the fact that increases in cost often come with increases in product quality. The issues are different with regard to the BLS employment survey’s, of course, because they deal with questions of the methodology of the survey, but as Jazz Shaw points out, making the survey more accurate could be problematic:
First of all, the survey is not just done by BLS workers. It’s conducted in conjunction with the census bureau. And how many people would they need to interview to produce more statistically meaningful results? Ten times as many? Polling professionals will tell you that it’s hard to get people to complete even a moderate size survey. Take a look at the current survey being used. The labor statistics section alone is more than 20 pages long. If you wanted to get a vastly larger sample, the government would need to be calling millions of people every month. It could turn an already bloated bureaucracy into an unmanageable behemoth.
Jazz seems to question the need for the unemployment reports altogether. I’m not sure I agree with this sentiment. In a modern economy, there’s some importance in the government, and specifically institutions like Congress and the Federal Reserve, having at least some idea of what the state of the economy might be. While it’s true that there are private surveys done by entities like Gallup and ADP that also survey the jobs market, they suffer from their own methodological problems and may not be any more reliable than the BLS survey. Taking the information the BLS provides away, as flawed as it might be, doesn’t strike me as the best response to this situation. Instead, I’d suggest that we should find ways to make the survey more reliable while at the same time making it more clear that a single month’s results aren’t nearly as definitive as the media makes them out to be.
With regard specifically to the September report, economists John Ryding and Conrad DeQuadros of RDQ Economics comment on the supposedly large increase in jobs reflected in the Household Survey portion of today’s jobs report:
This report is a tale of two labor markets. The establishment survey (payrolls) painted a picture of moderately growing employment over the last three months but at a marginally slower pace than over the last year. At this pace of job creation, the unemployment rate should be barely drifting lower given underlying demographic trends. In contrast, the household survey painted a picture of a sharply falling unemployment rate—down 1.2% points over the last 12 months. Such a rapid decline in the unemployment rate would be consistent with 4%-5% real economic growthhistorically but much of the decline is accounted for by people dropping out of the labor force (over the last year the employment-population ratio has risen to only 58.7% from 58.4%). We believe part of the drop in the unemployment rate over the last two months is a statistical quirk (the household data show an increase in employment of 873,000 in September, which is completely implausible and likely a result of sampling volatility). Moreover, declining labor force participation over the last year (resulting in 1.1 million people disappearing from the labor force) accounts for much of the rest of the decline. With this report, the ISMs, and vehicle sales, the September economy is off to a better-than-expected start but nowhere near as good as suggested by the decline in the unemployment rate.
(Emphasis in original)
As we already know, we aren’t in an economy where the economy is growing at a real rate anywhere near 4% to 5%. Indeed, the final revision of second quarter GDP ended up revising growth downward to 1.3% and the estimates for third quarter GDP, the first report of which comes out later this month, has it in the same general range but in any case no higher than 1.5%. So either the GDP numbers are way, way off, which seems unlikely, or there’s some statistical flaw in the Household Survey. Of course, once you take into account the fact that a large number of the new hires were apparently part-time and seasonal jobs, the numbers start to make more sense. More importantly, though, the last time we actually saw anything close to 800,000 jobs created in a single month was in an era when GDP was growing at a mind-blowing 9.3%. Based on all of this, it seems more likely than not, the Household Survey numbers for September are a statistical outlier that we are likely to see adjusted downward, with a subsequent upward tick in the Unemployment Rate, in the coming months.