Understanding the Discrepancies in US Labor Market Data
Recent doubts have been raised over the credibility of one of America’s primary statistics, which is non-farm payroll numbers. While the Establishment survey shows a vibrant US labor market with more employment opportunities being created, the Household survey points to a bleaker picture whereby employment is shrinking. This disparity poses a question over the validity and implications of these individual statistics for other economic policies and the responses from the market.
Employment in all sectors except farming is another key indicator of the health of the US labor market, which has direct implications for the action of the Federal Reserve and investors planning their moves. The release of such figures on a monthly basis attracts much interest, given the fact that they are perceived to reflect the current state of economic affairs and the trend of interest rates in the future. However, prior data have raised eyebrows due to declining trends with other financial parameters.
In May, the Establishment Survey reported the addition of 272,000 new jobs, suggesting a thriving labor market. Contrarily, the Household Survey indicated a decrease of 408,000 jobs, hinting at a weakening employment landscape. The divergence between these surveys stems from their differing methodologies and scopes.
The Establishment Survey, covering more than 650,000 employers, doubles the count of individuals in multiple-job holding and excludes agriculture. To estimate employment change, it uses business birth and death rates. The Household Survey, whereby 60,000 households are sampled, only identified one person, and they included those in agriculture. It assumes population growth and makes calculations from that place. The differences in these methodological aspects understandably result in differences in reported employment statistics.
The pandemic has also led to reduced response rates for both surveys and, therefore, affected their reliability. The ECMG’s Establishment Survey, particularly, has issues resulting from decreased participation of the business establishments. This decline makes it difficult to come up with accurate employment rates as fewer numbers distort the probability estimations.
These disparities have been investigated by economists who found the following reasons to explain why these different theories exist. It was again proven when Rogier Quaedvlieg of ABN Amro pointed out definitional differences and errors in scaling-up estimates as possible problems. With reference to the surveys conducted up to the year 2022, he observed that they have diverged due to changes in events after the emergence of the pandemic.
Employer surveys might be a better measure to capture the trend of foreign workers as more have been coming into the country in recent years. Furthermore, with changes in working patterns and new forms of business operations, it is tricky to approximate business birth and death rates. The Bureau of Labor Statistics (BLS) has assumed a higher net birth rate of businesses post-pandemic, which may overestimate job growth.
These discrepancies suggest that the US labor market may not be as strong as non-farm payroll numbers imply, nor as weak as the Household Survey indicates. Policymakers, including the Federal Reserve, should consider other economic indicators, such as jobless claims, hiring surveys, and unemployment rates, to gain a more accurate picture of the labor market.
Accurate labor market data is essential for informed economic policy and investment decisions. The BLS’s potential budget constraints and resulting cuts in sample sizes could further complicate data reliability. Supporting robust data collection efforts is crucial for maintaining the integrity of national employment statistics.
The divergence between the Establishment and Household Surveys underscores the complexity of accurately measuring employment in a post-pandemic economy. As policymakers and investors navigate these challenges, a comprehensive approach that considers multiple data points is necessary to understand the true state of the US labor market. Future efforts should focus on enhancing data collection methodologies and supporting the BLS to ensure reliable and timely labor market information.
The discrepancies in America’s non-farm payroll numbers highlight the need for caution in interpreting economic data. While the Establishment Survey shows robust job creation, the Household Survey suggests a decline in employment, pointing to potential weaknesses in the labor market. Addressing these discrepancies is essential for accurate economic assessment and policy-making.
