Category: labor markets

The last post generated some interesting responses in the comments, as well as on the blogs of Robert Waldmann, Brad DeLong, and PGL at Angry Bear.

Here are some points worth synthesizing:

1) Robert states:

The number cited in the op-ed criticized by Samwick is payroll employment, unshaped, unsliced, and selected because it is very very important.

My critique of Krugman has nothing to do with any reference to payroll employment. Krugman is discussing the labor force participation rate, the unemployment rate, and the employment-population ratio. All of these are drawn from the household survey and not the payroll survey, because they deal with decompositions of the whole population into those in or out of the labor force and of the labor force into those employed or unemployed.

2) Brad states:

I will concede that Paul Krugman should have written "primarily" rather than "only."

That concession is appreciated. We can differ on how important we think the distinction is.

3) However, that concession may not be enough. What generated the several posts of mine last fall was my attempt to figure out the extent to which the decline in the unemployment rate is due to the fact that "some of those without jobs stopped actively looking for work, and therefore dropped out of the unemployment statistics," as Krugman asserted.

In my original post, I considered the three usual augmented measures of the unemployment rate that the BLS tabulates in Table A-12 each month that specifically track those who are not in the labor force because they are not actively looking for work. Reviewing those numbers for the period between 6/2003 and 9/2004 (the period in question in Krugman's op-ed), we get:

• Unemployment Rate: Fell from 6.3 to 5.4 percent
• UR, Incl. discouraged workers: Fell from 6.6 to 5.7 percent
• UR, Incl. discouraged and other marginally attached workers: Fell from 7.2 to 6.4 percent
• UR, Incl. marginally attached workers and those employed part-time for economic reasons: Fell from 10.3 to 9.4 percent

Subsequent exchanges with readers and with some helpful folks at the BLS revealed that the BLS also collects information monthly on those who are not in the labor force but want a job, even if they have not searched recently enough and/or are not currently available to work. So we could add another bullet point (from my last post in the series in October) to include these people:

• UR, Incl. any who wants a job: Fell from 9.2 to 8.4 percent

Even measures of the unemployment rate that are specifically designed to pick up people who are out of the labor force because they stopped actively looking for work declined over the period in question. All of them fell by 0.8 - 0.9 percentage point, compared to the decline of 0.9 percentage point in the official unemployment rate.

4) I don't even get "primarily" from this. I would like to have Robert, Brad, PGL, Krugman, or anyone else show me an unemployment rate that fell over this period even primarily because "some of those without jobs stopped actively looking for work, and therefore dropped out of the unemployment statistics." This is what a fact-checker at the New York Times would have required of Krugman (even leaving aside his inappropriate use of the word "only" in the original statement) and what the rest of us, presumably including Okrent, would have hoped for as the standard followed at the Times. In my view, Krugman's assertion does not even rise to his own standard of using the standard data in the standard way.

5) I posited, in the absence of such a measure, that the unemployment rate could be falling because people were voluntarily leaving the labor force and being replaced by those who were formerly unemployed. This story fits all of the facts cited above. In the absence of a better story to fit those facts, I'll stick with it.

Brad makes a reasonable point that over the time period in question (and many months on either side), compensation has fallen relative to productivity. Tracking his calculations as best I can from this table, and using the average of 2003:Q2 and 2003:Q3 to approximate Krugman's starting point of 6/2003 and the average of 2004:Q3 and 2004:Q4 to approximate Krugman's ending point of 9/2004, we see that:

• Real compensation per hour in the nonfarm business sector increased over this period of time, by about 2%.
• Output per hour in the nonfarm business sector increased over this period of time, by about 4%.

Brad's point is that compensation trailing productivity does not support the story I have used to explain the facts above, since my story makes labor appear to be more scarce and scarcity would push up compensation at least as fast as productivity allowed.

Bearing in mind that this does nothing to resuscitate Krugman's specific point, I agree that it is surprising that 2% real growth in compensation per hour was enough to accommodate any additional scarcity created by people voluntarily leaving employment. Leaving aside the scaling by productivity for a moment, it suggests a fairly flat demand curve for labor.

The weak growth in real compensation per hour may also suggest that a very large share of the productivity increase that is driving the trend in compensation relative to productivity came in the form of improvements in the production process that substitute directly for additional labor. There may be a growing divergence between the average and marginal productivity of a worker. Admittedly speculative, but this is my initial reaction to Brad's statement:

I cannot come up with a story according to which the Samwick channel is the dominant one that is consistent with the growing gap between wages and productivity.

6) PGL states:

While Andrew Samwick has joined the cottage industry of those who parse every word from Paul Krugman, ...

I don't consider myself to be in this cottage industry. I gave one example because an example was called for. I do not believe that one example would constitute the "disturbing habit" mentioned by Okrent, but I also don't presume that this example is the only one. I consider myself to be much happier when I am not asked to read Paul Krugman's op-eds, let alone have to parse every word. There are better places to go for similar points of view.

Other blogs commenting on this post

This being the first Friday in December, the Bureau of Labor Statistics has released the Employment Report for November. Let's take a walk through the key numbers, most of which are provided in Table A in the summary.

1) The top line number is the change in nonfarm employment measured from the establishment (or payroll) survey in November. That came in at +112,000.

2) In each release, the data for the previous two establishment surveys are subject to revision. These revisions were -20,000 in September and -30,000 in October, so the total increase in nonfarm payroll employment in November compared to what was reported last month for October is 112,000 - 54,000 = +58,000, from 132,017,000 to 132,075,000.

3) Continuing with the establishment data, the workweek for private production or nonsupervisory workers fell from 33.8 to 33.7. This may not seem like much, but consider the following. Production and nonsupervisory workers account for four-fifths of nonfarm payroll employment. So every tenth of a decline in the workweek generates a reduction in labor utilization that is equivalent to:

(0.1 hour/prod worker) x (4/5 prod worker/total workers) x (132 million total workers) = 10.56 million hours

Since production and nonsupervisory workers averaged 33.8 hours per week, this is equivalent to a reduction in labor input equal to 10.56/33.8 = 0.312 million or about 312,000 workers. This more than outweighs the increase in the number of payroll jobs added (acknowledging that it is a bit of an approximation, given the rounding of the numbers to get the "four-fifths" and 0.1 numbers).

4) Finishing up the establishment survey, average hourly earnings for production or nonsupervisory workers increased by $0.01, to $15.83. This figure does not adjust for inflation, which would swing it to a decline. In addition, because of the reduction in the workweek, average weekly earnings for these workers fell by $1.25 to $533.47 (again before adjusting for inflation).

5) Turning to the household survey, the top line number is the unemployment rate. It fell by 0.1 percentage point in November, down to 5.4 percent of the workforce. However, this is rounding error again, since the change was really from 5.46 (rounded up to 5.5 in October) to 5.41 in November. Here's how the BLS (appropriately) wrote this up:

The jobless rate has been either 5.4 or 5.5 percent in each month since July. This is slightly below the rates that prevailed in the first half of 2004.

6) It is also of interest to see how the change in the unemployment rate occurred. It breaks down as: 439,000 more people in the labor force, due to higher employment of 483,000 workers and lower unemployment of 45,000 workers. There were also 209,000 fewer people "not in the labor force." The employment-population ratio and the labor force participation rate increased by 0.2 percentage points each, to 62.5 and 66.1 percent, respectively.

7) Note that the household and the establishment survey will often measure different numbers for the change in the number of people employed (here: 483,000 vs. 112,000). Part of this is due to different samples (e.g., household survey includes the self-employed, establishment survey counts multiple job holders). The rest is that they are both estimates of an underlying population number. In general, the establishment survey is to be preferred for the purpose of counting the change in the number of jobs, because that number is estimated more precisely in the establishment survey (it's a bigger survey and it uses administrative data).

8) We also care about the nature of unemployment. In a set of earlier posts (the last one is here), I discussed alternative measures of unemployment. The broadest one included all people who are not in the labor force (i.e., not actively looking for work) but who do "want a job." This group fell from 5,345,000 to 5,118,000 between October and November. If we reclassified them as unemployed (and thus in the labor force), this augmented unemployment rate would have fallen by about 0.2 percentage points, from 8.8 to 8.6 percent.

There are certainly other elements of the report to explore, but these are the highlights in my view.

To summarize, the top line number is payroll jobs, which came in positive but weaker than expected. Combined with a reduction in the workweek and small downward revisions to previous months, this is not a strong report. It shouldn't put any upward pressure on interest rates, via the pace of the Fed's tightening or the market's reaction. The information from the household survey was more positive, but month-to-month changes in the household survey are less reliable.

You can read media coverage at WSJ.com($), as well as see some video from CNBC's broadcast with alternative views (Mankiw, Zandi, Wessel).

UPDATE: Elsewhere in the blogosphere, the employment release is being discussed by Angry Bear, Econopundit, Macroblog, and Wizbang.