The Employment Situation – Disappointing But Not Disastrous

Today’s Employment Situation report, released by the Bureau of Labor Statistics (BLS), shows a disappointing slowdown in the growth of payroll employment, total non-farm employment rose by 39 thousand in November compared to an increase of 172 thousand in October, and an increase in the unemployment rate to 9.8 percent from 9.6 percent. But it isn’t as bad as it sounds. The report included upward revisions to the September and October payroll employment figures, raising the possibility of an upward revision for today’s figure next month, and a continuation of the upward trajectory since the beginning of the year, adding 86 thousand jobs on average per month. Private non-farm payroll growth has been somewhat stronger, averaging 106 thousand jobs per month.

The uptick in the unemployment rate, which comes from the household survey, is less alarming than it may appear because it reflects what’s happening with the labor force more than job growth, and this is a common post-recession labor market recovery phenomenon, with new entrants and re-entrants to the labor force swamping job growth. The labor force participation rate and employment to population ratio are “essentially unchanged” according to today’s report, but that’s just because the changes are small and the bases are so big.

It is important to understand that the establishment survey provides estimates of the number of jobs on and added to business establishment payrolls, while the household survey provides estimates of the number of people employed, unemployed and in the labor force. Because of differences in samples, coverage and focus the two surveys can produce confusing results. For example, the household survey’s estimate of people employed is larger than the establishment survey’s estimate of payroll employment, mainly because the household survey includes the self-employed. Today’s report included an increase in payroll employment but a decline in the number of persons employed. This is unusual but not unprecedented. The establishment survey is generally considered a better indicator of job growth because of its much larger sample size, but it cannot provide estimates of the unemployed and therefore the unemployment rate. That’s why there’s two surveys. In general, the two surveys usually provide consistent descriptions of labor market dynamics (see Figure 1).

Technically, the unemployment rate ticked up in November because the household survey showed an increase of 276 thousand in the number of the unemployed, the combined effect of a 173 thousand decline in those employed and an increase in the labor force of 103 thousand. But if you believe the establishment survey is a better indicator of job growth, then the increase in the unemployment rate is primarily reflecting labor force growth. In fact, early in the year the unemployment rate was steady at 9.7 percent while employment and the labor force grew roughly in proportion. The up and down movements in the unemployment rate since April have been tracking movements in the labor force while employment has been comparatively flat (see Figure 2).

Increases in the labor force following recessions are viewed as a positive sign, indicating that job seekers are more optimistic about their prospects of finding employment. Increases this year are in contrast to declines through most of 2009 as discouraged seekers stop looking and potential new entrants postponed entering the labor force (e.g., seeking additional education/training).

So today’s report was disappointing but not disastrous. We are still well below the pace of job growth needed to bring the unemployment rate down significantly, but private sector job growth has improved over the year and the uptick in the unemployment rate might turn out to be a harbinger of further improvement.