Those Strange Jobs Numbers

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It was the big twist in last week's so-so jobs report. Labor Department number crunchers said they had–oops!–undercounted by a whopping 810,000 the number of jobs created by the U.S. economy for the 12 months ending in March 2006. That means nearly 3 million new jobs were created instead of just over 2 million. So what does the megarevision–the biggest ever in terms of absolute numbers–really mean? To get some insight, I shot an E-mail to Diana Furchtgott-Roth, a former chief economist at the Labor Department and currently director of the Hudson Institute's Center for Employment Policy in Washington, D.C.

Do you think the Labor Department's Bureau of Labor Statistics is probably still underestimating job creation?

It is certainly possible that BLS is continuing to undercount the numbers, because they don't know where the error is. BLS says the error is distributed over all regions and all industries… . If it were one known industry or region, they would solve the problem, and we would know that the undercounting would stop. My suspicion is that as we get more entrepreneurs and small firms in the economy, it is harder to measure payroll jobs, because it's harder to sample large numbers of small firms than small numbers of large firms.

So does this mean the unemployment rate is actually lower than 4.6 percent?

The unemployment rate is not affected by this adjustment. We have two surveys for employment. The payroll survey, which was adjusted by 810,000, is based on a survey of 400,000 employers to ask how many people they employ. The household survey, which produces the unemployment rate, is based on a survey of 60,000 households and asks who in the household is working. The household survey is never revised or corrected. Hence, even though the unemployment rate may be wrong, we will never know. Both surveys suffer from errors, and neither is perfect.

It seems that the only bad news here is that the higher job number means productivity was not as strong since gross domestic product is determined by how much output each worker produces.

The lower productivity number has advantages and disadvantages. The advantage is that more Americans were employed. The disadvantage is that if productivity, defined as output per unit of labor, declines, then wages are lower. That's perhaps why wages have not risen as much as we thought that they should have. Countries want high productivity because this means that labor is used efficiently and employers can afford to pay higher wages. However, countries also want low unemployment. Productivity has been very high over the past few years, so a downward adjustment is not a major drawback. The average annual growth rate of productivity since the business cycle peak in March 2001, 3.2 percent, before the jobs adjustment, has been one of the best rates in over 30 years.