Here. We. Go.
Again. The Department of Labor's July Employment Situation Report
is out this morning, and the news is good. And not good. The
unemployment rate stands at 5.5 percent in July, compared with 6.3
percent a year ago and an average of 5.8 percent in the 1990s.
Fundamentally, the employment situation in America is solid, but
the sluggishness of payroll job growth is stunning and out of line
with a host of positive indicators. The strength of today's labor
market is yet another sign that the President's 2001 and 2003 tax
cuts were effective policies and must be extended.
is not a problem in America, but the establishment survey of
payrolls has a clear problem. According to the official statement
from the commissioner of the Bureau of Labor Statistics, which
publishes the monthly figures, "As measured by the household
survey, employment rose by 629,000 over the month, compared with a
change of 32,000, as measured by the establishment survey." Since
1948, there have been 62 instances where household data reported
500,000 new jobs or more, coinciding with a payroll average of
240,000. July's net gain in payroll jobs marks the 11th straight
month of rising payroll employment but still came in well below
analysts' expectation of 247,000. What's going on?
The key, once
again, is the difference between the two employment surveys. The
payroll survey measures employment at established firms but does
not count self-employed consultants, contractors, farmers, and the
like. Worse, the payroll survey is highly susceptible to changing
rates of turnover. When job-changing dips due to higher
uncertainty, the payroll survey artificially deflates. So the gap
between the two surveys, which had narrowed a bit in recent months,
is now at 3 million (see Chart 1). Since March 2001, the payroll
survey suggests there are 1.24 million fewer jobs, in contrast to
the household survey's measure of 1.81 million more working
Americans-more than ever before.
And today of all
days, the Labor Department published its very first, preliminary
assessment of the impact of job-changing on the payroll survey (see
"Effects of Job Changing
on Payroll Survey Employment Trends"). It acknowledges the
Heritage Foundation's analysis from March 2004 (see "Diverging
Employment Data: A Critical View of the Payroll Survey" by Tim
Kane, Ph.D.) that worker turnover has a significant effect
on the payroll survey, inflating the total count by over a million
jobs, but also by over-emphasizing job losses during business
cycles when turnover declines. Since
March 2001, BLS estimates that the "job-changing effect" has led to
an overstatement of 251,000 job losses in currently published
Which Survey to
It is important to
understand the methodological problems of the payroll survey, but
it is more important still to consider both surveys in light of all
the other labor market indicators, which are generally positive.
The ISM manufacturing and non-manufacturing employment indices, for
example, have been at 50 or above-indicating improvement-for 14 and
10 straight months respectively, including several all-time highs.
Consumer confidence is rising.
One of the best
independent indicators is the weekly report of initial jobless
claims, which have been dropping for the past twelve months and are
now steady in the range of 340,000 a week. Levels below 400,000 are
widely perceived to reflect a healthy, growing workforce. Further,
real GDP growth averaged 3.75 percent annually during the first
half of 2004, a period of strong job creation.
Fewer Long-Term Unemployed
The last few
months have brought needed relief to long-term unemployed workers.
The number of long-term unemployed has declined by over 300,000
workers since March (see Chart 2). In July alone, the number of
workers unemployed for more than 27 weeks declined by almost
100,000. Workers who have been unemployed for less than 5 weeks
have grown as a percentage of the unemployed.
length of unemployment spells dropped sharply in July from 10.8
weeks in June to 8.9 weeks. And the average length of unemployment
dropped from 19.9 weeks in June to 18.6 weeks because of the
decline in long-term unemployed workers. It is good news for
unemployed workers that the duration of the period of unemployment
has declined since the summer of 2003.
report is significant for two reasons. First, it underscores the
positive trends in the economy with the 11th consecutive month of
improvement. Second, it is the largest divergence in measures of
total employment between the two BLS surveys in years, which means
that economists must finally reckon with the problems of the
payroll survey. The household survey has been under attack by
pessimists for a variety of reasons, but today's report shows that
it to be more in line with other indicators of a strengthening
economy. Jobless claims are down, unemployment durations are
falling, and average pay is rising.
Finally, it is
important to remember what the report does not show. The
President's economic policies are keeping the unemployment rate
low, and predictions of rising claims for unemployment insurance
have not materialized. Maintaining free trade in the face of the
outsourcing scare has not resulted in lower worker earnings or weak
employment, but the opposite. Most importantly, the tax cuts of
2003 have been followed by 11 straight months of payroll job growth
and millions of entrants to the labor force.
Tim Kane, Ph.D., is
Research Fellow in Macroeconomics and Rea Hederman is a Senior
Policy Analyst, in the Center for Data Analysis at The Heritage