Tuesday, December 9, 2003

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The employment debate

Last week I blogged about the debate over productivity numbers. This week it's the employment numbers that are being questioned. Amity Shlaes makes a good case that the accepted statistics are overestimating the unemployment rate -- though, as she points out, this affects the productivity debate. The good parts version:

Skeptics charge that government data are imprecise and that they obscure the true economic pain that comes as manufacturing jobs disappear.

The skeptics are correct--the data are not perfect. The problem, however, is not one of right versus left but of old versus new. The methods Washington uses to collect these numbers were determined in a calmer economy where people worked for one company all their lives....

[T]he trouble with government data is that they have a hard time recording the good news. The first example of this is the much-debated Household Survey, a poll that phones families at home to inquire about employment status. The survey has shown strong employment lately so the Bush critics tend to argue that it is too positive. But the opposite is probably the case.

When someone does not answer at home, the phone pollster simply dials another number. And in the era of two-parent employment, houses where no one is at home are more--not less--likely to be houses where the adults work. The analysts try to compensate for this but the study has a bias that causes it to miss employment, not exaggerate it.

Then there is the Establishment Survey, a measure that focuses on collecting employment data from workplaces. Its lower numbers have made it a favorite of opponents of President Bush. But the survey sometimes fails to capture self-employed contractors and entrepreneurs--a ubiquitous type in the Staples economy. Well aware of such problems, officials have created a meter to measure "births" and "deaths" of companies but have not yet perfected that measure.

David Malpass of Bear Stearns thinks the federal data fail to take into account the degree to which companies are now contracting out work. The reasons for that contracting are often negative--screamingly high health-care costs for employees, the pressures of post-crash and post-Enron government regulation. But the consequence is that workers may be under-recorded.

Malpass points to other data that indicate hidden growth or hidden growth potential. Non-farm proprietors' income, a measure that looks at the profitability of unincorporated business, is up strongly; the growth outpaces late-1990s rates. The number of self-employed in the Household Survey has risen sharply as well. This suggests a strong recovery, since new businesses are an engine of U.S. growth. Now we come to another big measure: productivity, which was at a disconcerting high of 9.4 percent last quarter. The formula for determining productivity is output divided by labor and other inputs, more or less. So if the statisticians are undercounting labor, productivity may be less impressive than advertised.

Combine Shlaes' analysis with Stephen Roach's analysis, and one has to conclude that the productivity numbers are probably exaggerated a bit.

posted by Dan on 12.09.03 at 10:04 AM


Perhaps it's just me, but I don't think that it really matters if the numbers are over- or under-stated. To me, the most important thing about the unemployment and productivity numbers are their relative rates. That is, I don't really think it matters if the number is 5.9; what's important is that we know that 5.9 is a mediocre number. Let's just say that the unemployment rate is understated by 1.5, so that during the late '90s it wasn't around 4.5 but rather was around 6.0. So what? Does that meant that the economy wasn't good? All we need to know is 4.5=good and 5.9=mediocre. As long as the over- or under-statement is relatively consistent through time, then, we shouldn't worry too much about the degree of over- or under-statement.

posted by: Al on 12.09.03 at 10:04 AM [permalink]


The problem is that the magnitude of error between the two unemployment figures may not be the same, and thus they may not be comparable without some careful consideration. For example, suppose that the late 90's figure overestimates unemployment by 0.3%, but as a result of structural changes in the economy since the dot-com bust, the 2003 figures overestimates unemployment by 0.9%. This gives us "real" unemployment rates of 4.2% and 5.0% for late 90's and 2003 respectively, both of which are quite "good" numbers. Or, in other words, what was once a "mediocre" figure may become a "good" one because the measurement tools aren't keeping up with changes in economic structure of the nation.

posted by: Tom Ault on 12.09.03 at 10:04 AM [permalink]

The productivity rate, it seems to me, is based largely on conventional wisdom. Over the past 10 or 15 years, a company whose stock was sliding could simply lay off 15,000 workers or whatever, and its stock would automatically rise. The market was somehow assuming that the company was trimming deadwood or some such, when anyone who's gone through such a process on the ground knows that it's often the ones with the best job knowledge (who've been there longer), or the most competent (since they'll make others look bad) who are the ones to be laid off. The combination of more work for the remainder and bad morale from the layoff probably trashes productivity.

My impression of the past few years in the real world is that, in fact, the folks still employed at corporations are the fiercest cube weasels, not the hard workers. Many functions aren't being done as well, and people are dropping the ball in easy situations. How does one get increased productivity here?

posted by: John Bruce on 12.09.03 at 10:04 AM [permalink]

Corrected error in my URL above.

posted by: John Bruce on 12.09.03 at 10:04 AM [permalink]

A friend of mine who worked for FEMA during the 1995 Mt. Vision fire on the Point Reyes peninsula reported that many, perhaps most, of the burnt-out homes turned out to contain home businesses. A lot of which were _illegal_ home businesses. And they weren't mostly computerized work-at-homes either - many were arts & crafts type with workshops and, in some cases, small and quite illegal foundries for metal work.

This is not a normal sample as most of those home businesses were to provide income for people who wanted to live in a gorgeous park area, but it does illustrate the difficulty of categorizing employment.

Bob had a grand time showing all the melted cars to visiting VIP's from the Small Business Administration.

posted by: Tom Holsinger on 12.09.03 at 10:04 AM [permalink]

Some have argued that the true unemployment rate is actually higher than the government stats indicate. For example, take Austan Goolsbee, a UChicago econ prof, writing in an NYT op-ed from Sunday a week ago:

The government reported that annual unemployment during this recession peaked at only around 6 percent, compared with more than 7 percent in 1992 and more than 9 percent in 1982. But the unemployment rate has been low only because government programs, especially Social Security disability, have effectively been buying people off the unemployment rolls and reclassifying them as "not in the labor force."

In other words, the government has cooked the books. It has been a more subtle manipulation than the one during the Reagan administration, when people serving in the military were reclassified from "not in the labor force" to "employed" in order to reduce the unemployment rate. Nonetheless, the impact has been the same.

This underestimation may counteract the overestimation the post discusses.

posted by: Dimmy Karras on 12.09.03 at 10:04 AM [permalink]

Re: "not in the labor force" - If a person decides to forgo employment, and decides instead to collect benefits (unemployment, social sec. etc.), why is it considered "cooking the books" if they are not counted as "unemployed"? If they aren't actively seeking employment, how can they be called "unemployed?" Perhaps a better word is "slacker?" - This is even more true of those who "gave up."

posted by: Bruno on 12.09.03 at 10:04 AM [permalink]

Dimmy, people in the military are not employed? I think they would disagree.

Those who have dropped out of the labor pool for whatever reason should not be counted among the "unemployed" for these purposes (or do you think we should also count retired people as "unemployed"? Ditto for housewives[husbands], etc.)

Bruno, largely agreed except on those "collecting unemployment". They have not quit looking and have not dropped out of the labor pool (been there, done that).

One thing that is missed in all these discussions (at least I have never seen it discussed) is how long people tend to be unemployed. This is probably a function of old vs. new industries. There is a big difference between factory jobs (where new jobs are difficult to find) and tech jobs (where people are more likely to find new jobs quickly).

posted by: Ken Summers on 12.09.03 at 10:04 AM [permalink]

Ken Summers writes: "Bruno, largely agreed except on those "collecting unemployment". They have not quit looking and have not dropped out of the labor pool (been there, done that)."

You can't collect unemployment if there's no unemployment left to collect. Just because your benefits ran out doesn't actually mean you're not looking for work.

The fact is, if you've been unemployed for a long while, employers aren't interested. You can look all you want, and apply all you want, and you're not going to get hired.

I have personal experience of recruiters pursuing me until they realized how long I've been out of work, at which point they end contact. No change in my resume or skillset, just a change in their perception.

posted by: Jon H on 12.09.03 at 10:04 AM [permalink]

Also note that Congress has incentive to not extend unemployment benefits.

If they extend benefits, there will be an increase in 'continuing claims', which makes unemployment look worse.

If they let people run out of unemployment benefits, those people fall out of the unemployment calculations, making the numbers appear better than they are.

posted by: Jon H on 12.09.03 at 10:04 AM [permalink]

Ken Summers writes: "tech jobs (where people are more likely to find new jobs quickly)."

Ha. That used to be the case, but it certainly isn't true anymore.

posted by: Jon H on 12.09.03 at 10:04 AM [permalink]

Jon, don't misunderstand what I meant.

People who drop out of the job search should not be counted. By "collecting unemployment", I was just commenting on Bruno's use of the term. People who have run out their unemployment insurance but are still looking should be counted (I'm not addressing the issue of extending unemployment, although I don't know that this affects the numbers as you say; the number I usually hear in the reports is new claims).

Also, please don't get hung up on the term "tech jobs". I'm just pointing out that there is nothing in the numbers I've seen to indicate how long people are out of work, irrespective of the type of job. I strongly suspect this varies by industry.

posted by: Ken Summers on 12.09.03 at 10:04 AM [permalink]

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