Throughout this economic expansion monthly job growth in the Labor Department’s establishment survey (a.k.a. the payroll survey) has understated the strength of the economy and the labor situation. Job growth for January in the establishment survey came in at a weaker-than-expected 146,000, with the previous three months revised down by a total of 59,000 to an average 182,000 new payroll jobs per month. But this is not a poor result for this survey. Rather, it is fully consistent with an improving and relatively strong labor situation, continued rapid economic growth, and a durable, multi-year expansion.
The establishment survey shows a record 132.6 million jobs currently, which tops the previous high reached in February 2001. The household survey — the Labor Department’s other, lesser-recognized employment measure that includes the self-employed — shows that jobs hit a record 140.3 million in November 2004, with January coming in at 140.2 million.
Job growth in the establishment survey hasn’t been a good indicator of the employment situation in recent years. It overstated job growth in the late 1990s and has been reverting to normal this decade. In July 2000, employment in the establishment survey reached an impossibly high 98.3 percent of the household survey. The establishment survey, a complicated statistical sample, did not keep up with changes going on in the U.S. economy and hence overstated jobs.
In the late 1990s, the changes were toward employment in established businesses due to stock options and rising stock prices for big, publicly traded corporations. In addition, more workers changed jobs during the decade, and spent less time between jobs, causing the statistical adjustments in the establishment survey to overestimate employment.
In recent years, the establishment survey has shown less job growth than the household survey, reversing the aberrations of the late 1990s. The household survey, meanwhile, has been the better measure of employment over the last 8 years, a period in which macroeconomic volatility has dominated the employment situation and the dollar’s value and interest rates have swung to extremes. The unemployment rate, which is based on the household survey, fell to 3.8 percent in April 2000. That was an accurate measure of the strength of the labor situation.
Since the 2001 recession, the unemployment rate has fallen to 5.2 percent from 6.3 percent, indicating a sharp improvement in labor conditions and a return to relatively full employment. An establishment-survey result of 125,000 to 135,000 new jobs per month would be enough to maintain the current unemployment rate, even if labor-force growth continues at the solid pace it averaged over the past 10 years.
While employment in the establishment survey rose 226,000 per month between 1998 and 2000, that rate caused unemployment to decline from 4.6 percent to 3.9 percent and also created the bulge in the establishment/household ratio. Future establishment-job growth will not have to be nearly as strong to maintain the relatively low unemployment rate.
With real wage rates already showing some upward pressure at the present unemployment rate, the appropriate interpretation of the labor situation is that the economy is enjoying relatively full employment.
The view that the participation rate in the economy is low or plunging is simply wrong. At 65.8 percent, it is high by historical standards, though down from the peak of 67.3 percent reached in January 2000. The participation rate will not likely rise back to that level, nor will the unemployment rate fall to 3.8 percent.
The current participation and unemployment rates are consistent with a fast-growing economy and a durable multi-year expansion.
– David Malpass is the chief economist for Bear, Stearns.