This morning there is a litany of articles on employment growth since the end of the last recession. (See here, here and here for examples) Of course, much of the debate centers on which side of the political spectrum you fall on. Staunchly Democratic pundits continue to point at the Bureau of Labor Statistics (BLS) employment data, particularly the unemployment rate, as clear evidence that the economic recovery is in full swing. Conservatives will direct your attention to the labor force participation rates and lack of wage growth that it is not.
However, the one thing that all the debate has in common is the use of that singular employment data set published monthly by the BLS. The employment data is some of the most highly anticipated, and hotly contested, economic data in both the financial and political arenas. Yet, no one questions the validity of the data which is collected once a month via a survey of about 60,000 eligible households. After the data is collected by the interviewers it is then compiled into a report that is subsequently somewhat tortured by seasonal and birth/death adjustments.
The chart below shows the annual net change of employment as reported by the BLS going back to 1988.
While it is clear that employment has recovered sharply from the 2009 recession lows, the question remains as to whether it accurately reflects the real employment situation in the country today.
As I stated above, the arguments about labor force participation are varied. Some suggest that the rate is low because of the retirement of “baby boomers” while other suggest that it is a function of the real economy. One way to look at labor force participation is to analyze the group of individuals that “should” be primarily employed which are those between the ages of 16 and 54 that are NOT institutionalized, disabled or otherwise unable to work. Currently, the labor force participation rate of that age group is roughly 46%.
Yes, there are many in that age group that have chosen not to work to raise a family or go back to school, but it is hard to suggest that those individuals make up more than half of the group.
So, this does bring up the obvious question.
“IF the labor force participation rate of the primary working age group is not rising, then where is the “strongest gains in employment since the 1990’s” coming from?”
My friend Doug Short has a partial answer to this question.
“I’ll close this analysis with a chart that essentially demolishes the prevailing view of our aging population as a demographic drag on labor supply. Here is the ratio of the 65-and-over cohort as a percent of the employed civilian population all the way back to 1948, the earliest year of BLS employment data. Mind you … these people are not only in the workforce, but also actually employed.”
“The percentage of elderly employment is hovering at its historic high — now double its low in the mid-1980s. This is a trend with multiple root causes, most notably longer lifespans, the decline in private sector pensions and frequent cases of insufficient financial planning. Another major cause, I would argue, is the often surprising discovery by many of the elderly that the “golden years of retirement” might be less personally satisfying than productive employment. Note that the growth acceleration began in the late 1990s, prior to the last two business cycle downturns (aka “recessions”).”
However, that does not completely resolve the issue of the disparity between reported employment and the large number of individuals sitting outside the labor force. The answer likely resides in the BLS’s employment calculation process and the subsequent adjustments that may potentially be overstating employment gains.
The most questionable of those adjustments is the birth/death model which is a monthly guess at the addition and subtraction of businesses to the economy. Recently, the CEO & Chairman of Gallup, a non-government related surveying entity, recently took the BLS to task on the measure stating:
“We are behind in starting new firms per capita, and this is our single most serious economic problem. Yet it seems like a secret. You never see it mentioned in the media, nor hear from a politician that, for the first time in 35 years, American business deaths now outnumber business births.
The U.S. Census Bureau reports that the total number of new business startups and business closures per year — the birth and death rates of American companies — have crossed for the first time since the measurement began. I am referring to employer businesses, those with one or more employees, the real engines of economic growth. Four hundred thousand new businesses are being born annually nationwide, while 470,000 per year are dying.”
This is an extremely important point as it suggests that employment, as presented by the BLS, has been significantly overstated over the past six years. If we take the differential as stated by Gallup and compare that to the annual birth/death adjustment used by the BLS we find that jobs have been overstated by 3,678,000 or more than 613,000 annually.
How does this compare to the cumulative number of jobs as reported by the BLS since 2009? It is quite substantial.
If we assume that Gallup is correct in its assessment, this goes a long way in explaining the existing slack in the labor force and lack of wage growth. However, Jim summed it up best by when he stated:
“My hunch is that no one talks about the birth and death rates of American business because Wall Street and the White House, no matter which party occupies the latter, are two gigantic institutions of persuasion. The White House needs to keep you in the game because their political party needs your vote. Wall Street needs the stock market to boom, even if that boom is fueled by illusion. So both tell us, ‘The economy is coming back.’
Let’s get one thing clear: This economy is never truly coming back unless we reverse the birth and death trends of American businesses.”
Is the BLS overstating employment growth? I guess it depends on whose data set you choose to believe. However, there is little denying the fact that with over 60% of the population living paycheck-to-paycheck, stagnant wage growth and declining net worth over the last five years, there is something that simply does not add up. If employment growth were indeed growing as strongly as in the late 90’s, it would seem logical to expect that many of the disparities in the economic landscape should be starting to equalize somewhat. Unfortunately, that has yet to be the case.
Images: Flickr (licence attribution)
About The Author
Lance Roberts – Host of StreetTalk Live
After having been in the investing world for more than 25 years from private banking and investment management to private and venture capital; Lance has pretty much “been there and done that” at one point or another. His common sense approach has appealed to audiences for over a decade and continues to grow each and every week.
Lance is also the Chief Editor of the X-Report, a weekly subscriber based-newsletter that is distributed nationwide. The newsletter covers economic, political and market topics as they relate to the management portfolios. A daily financial blog, audio and video’s also keep members informed of the day’s events and how it impacts your money.
Lance’s investment strategies and knowledge have been featured on Fox 26, CNBC, Fox Business News and Fox News. He has been quoted by a litany of publications from the Wall Street Journal, Reuters, The Washington Post all the way to TheStreet.com as well as on several of the nation’s biggest financial blogs such as the Pragmatic Capitalist, Zero Hedge and Seeking Alpha.