Sunday, February 01, 2004

Voodoo Economics I: or Oh where oh where did all the jobs go?

INTRODUCTION:
As Andrea Hopkins of Reuters news-service reports there is a continuing dispute about how accurate the current measures of unemployment are. Are we in a so called "jobless recovery" (Federal Reserve) or are the traditional measures of unemployment somehow missing all the new jobs being supposedly created by the robust economic growth (GDP 4% and up)? One claim as reported by Hopkins is that self-employment may be masking job growth:

" WASHINGTON (Reuters) - According to the most widely accepted measure of U.S. employment, public-speaking coach and consultant LeeAundra Temescu was not among the 130 million Americans who had a job in 2003...

" Because she is one of more than 15 million self-employed workers in the United States, Temescu is on nobody's payroll -- and thus does not show up on the Labor Department's employer survey used each month to assess the strength of the job market.

" The failure of the survey to count independent contractors has come under fire by President Bush's economic team and some analysts, who argue it underestimates job growth by ignoring one of the fastest-growing sectors of the economy.

" There is a big error factor in those numbers," Treasury Secretary John Snow said after Labor reported a scant 1,000 rise in December payrolls. "I think they may well have understated (job growth), and we will see a restatement in the future."

" A rise in self-employed and other nonpayroll workers would bolster the argument of Bush supporters that the "jobless" nature of America's recovery has been exaggerated."


SO WHAT DOES THAT MEAN?:
As the WaPo reports there may be a structural economic shift in the labor workforce from
traditional employees to free-lancers. As the article notes "While economists agree there is more self-employment, they disagree about whether this is a temporary adjustment that will soon give way to more robust growth in traditional jobs, or a lasting change in the nature of work and the relationship between employer and worker."

This may not all be good news however. As Daniel Gross of Slate reports there may be a fundmantal disagrement on how to measure unemployment. Essentially one way argues that what is going on is good - and that GW Bush's economic stewardship is good. The other interpretation is an indictment of what is going on as bad for the US worker and the American economy. Daniel Gross writes:

" The Bureau of Labor Statistics measures employment in two ways... Occasionally, the two surveys show divergent trends in job growth—especially when an economy is coming out of recession. According to the payroll survey, the number of jobs fell 232,000 over the course of 2003 on a seasonally adjusted basis. But according to the Household Survey, which includes farm workers, the self-employed, and people who may work off the books, the number of Americans working rose by 1.03 million in 2003 on a seasonally adjusted basis.

" Last October, I dubbed the debate over the two surveys, and the emerging campaign to ignore the payroll numbers and focus on the household numbers, "antidisestablishmentarianism." Last week I described how it has become central to the Republican defense of President Bush's economic stewardship. The comparatively strong Household Survey figures also bolster the Republican case for refusing to extend the federal Temporary Extended Unemployment Compensation program...

" What accounts for the gap between the two figures? The payroll survey is less likely to capture the self-employed, newly formed businesses, or domestic employees. So it could be that the millions of Americans who have been laid off are busy starting companies, or working full-time as self-employed consultants. All of this entrepreneurial energy would show up in the Household Survey and be good news for the economy.

" Alternatively, the millions of Americans who are self-employed could simply be frustrated in their efforts to find full-time, salary-and-benefits-paying work at established companies. In other words, as Barry Ritholtz, chief market strategist at Maxim Group and an emerging blogger, has suggested, they're self-employed because they're unemployed. That would be bad news for the economy, and it probably wouldn't show up in the Household Survey.
"

ANTICS OF THE ACADEMICS:
As one might expect, this sort of highly divergent interpretations tends to divide people into two camps. One net-fest of back and forth accusations is captured here at "Hiss Hiss I Say," at Daniel Drezner's Weblog. It involves and argument between him and Brad Delong over "who is right" regarding an interpretation put forth by Paul Krugman. It's freaking hilarious and ought to be read for just that. It shows though how deeply the divisions go on this issue. Brad Delong just doesn't leave it at that either, here he takes on (highly successfully) Timothy Kane in his piece "The Chocolate Ration Is Up Again," for trying (once again) to explain away the job discrepency numbers. The Barry Ritzholtz mentioned by Daniel Gross in the Slate article above also puts in his two cents at his weblog The Big Picture.

SO WHO IS RIGHT THEN???
Since the argument of the other side basically boils down to either A) "No really, there really are more jobs even though you can't find them. They're somewhere out there, really!" or B) "Professionals temping or freelancing without health and retirement benefits counts as real jobs." you can guess where the oldman comes down on the argument. But this leaves the contentious issue of which unemployment instrument is "correct" - the payroll survey or the household survey? The oldman thinks the answer is pretty clear. According to the payroll survey since about three years ago the American economy lost about three million full-time jobs, and according to the household survey some smaller number of part-time or free-lance jobs were created as people tried to make ends meet when unemployment benefits ran out and they couldn't find a permanent job with benefits.

Is there anything to support the oldman's speculation? Well a source no less august than Federal Reserve Governor Ben S. Bernanke has publicly stated as of November 6th, 2003 which unemployment measurement survey the Federal Reserve considers more reliable. He writes:

" Which, if either, of these two surveys are we to believe? The payroll survey has the important advantage of being based on a much larger sample... Moreover, one would generally presume that firms' payroll records are likely to be more accurate than the information obtained by interviewing household members... On the other hand, the household survey has potential advantages of its own: For example, it may capture "off-the-books" employment, which will generally be missed by the payroll survey. Some analysts have also suggested that the household survey may be more effective than the payroll survey at capturing jobs created by new businesses, particularly small businesses, during the early expansion phase of the cycle. On this latter point, however, a recent redesign of the payroll survey, which among other improvements allows new samples of employers to be drawn more frequently, has likely improved the survey's coverage of startup businesses. Indeed, the latest two benchmark revisions, in March 2002 and March 2003, both revised payroll employment downward; if the main problem with the survey had been a failure to measure employment by new businesses, the revisions would have been upward.

" A team of BLS and Census statisticians (Nardone and others, 2003) recently conducted a careful comparative study of the two surveys. Although the study does not come to firm conclusions, it does suggest one possibly important reason to believe that the household survey is currently overstating employment growth....

" To summarize, we do not fully understand the differences in employment reported by the payroll and household surveys, and the truth probably lies in between the two series. However, because of the larger sample used in the payroll survey and because of possible problems with the population estimates used to scale the household survey, somewhat greater reliance should probably be placed on the payroll survey.

" Whatever the verdict regarding the relative reliability of the two surveys, their differences should not obscure the fact that the U.S. labor market has been weak.
"

So if we are to look at the careful examination of the experts, it is clear that we should place greater faith in the payroll survey figures of unemployment even though they report a greater number of jobs lost. The extra jobs being reported in the household survey are most likely created by a miscount by the Census Bureau of immigration, counting in non-benefit freelance or odd jobs taken to make ends meet, and statistical variations introduced by its small sample size compared to the general population. Since we are expected to consider the Federal Reserve to still be an independent, impartial, and objective source of information the oldman gives the last word to the Fed. As the old saying in market circles goes: "Don't fight the Fed."

SUMMARY:

The conclusion that needs to be drawn is that the "jobless economy" is in fact live and well, and it is NOT a figment of imagination or an urban myth created by anecdotal tales. There is firm macro-economic data and analysis which indicates that in the past three years many "good" jobs with benefits have disappeared. As unemployment benefits are running out, people are being dropped from the official unemployment numbers leading to the ridiculously understated nominal 5.7% unemployment rate. The economy is not static however, and these people must obtain an income somehow, leading them to adopt freelance, temporary, and consulting type odd jobs rather than working for a steady employer. Note that the oldman is not per se against freelancing, but he notes that many of these "freelancers" are getting paid less than they would have at a steady job and are short health and retirement benefits to boot. These are mostly jobs without a future. A lucky few will undoubtedly be able to build up their odd jobs into a regular self-owned business / practice but the majority will remain in the bowels of the economy condemned to doing odds and ends while they chase the mercurial mirage of financial security.

Egads, we really are screwed aren't we?

0 Comments:

Post a Comment

<< Home