Business Insider Unwittingly Exposes BLS Employment Error
Since the end of the financial crisis, economists, analysts, and the Federal Reserve have continued to point to the monthly employment reports as proof of the ongoing economic recovery. Even the White House has jumped on the bandwagon as the President has proudly latched onto the headlines of the “longest stretch of employment gains since the 1990’s.”
Yes, there has definitely been an improvement in the labor market since the financial crisis. I am not arguing that point. The financial markets, investors, and analysts eagerly anticipate the release of each employment report hoping for a “Goldilocks” report which is “not so hot” the Fed is pushed to raise rates, but “not too cold” either.
My problem has been the discrepancy between these reports as compared to what is happening in the underlying economy. The chart below shows employment gains from 1985-2000 versus wages and economic growth rates.
As compared to 2000-2016.
See the problem here?
IF employment was indeed growing at the fastest pace since the 1990’s, then wage growth, and by extension, economic growth should be at much stronger levels as well. That has YET to be the case outside of mandated minimum wage increases.
However, it was Bob Bryan via Business Insider who inadvertently stumbled upon the issue I have discussed previously that explains the primary problem with the BLS employment reports. To wit:
“Both the formation of firms and establishments, have dropped off precipitously since the financial crisis and remained low.
This is important because new businesses typically hire faster and produce higher levels of productivity than firms that have been around for a while. Thus the decline in business formation can explain some of the labor market’s post-recession problems, and is at least part of the reason for the steep drop in productivity.”
What Bob missed was the connection between the falloff in formations and the BLS employment reports. Part of the reporting problem that has yet to corrected by the BLS is the continued overstatement of jobs through the“Birth/Death Adjustment” which I addressed recently in greater detail.
“For example, take a look at the first slide below.”
“This chart CLEARLY shows that the number of “Births & Deaths” of businesses since the financial crisis have been on the decline. Yet, each month, when the market gets the jobs report, we see roughly 180,000 plus jobs.
Included in those reports is an ‘ADJUSTMENT’ by the BEA to account for the number of new businesses (jobs) that were “birthed” (created) during the reporting period. This number has generally ‘added’ jobs to the employment report each month.
The chart below shows the differential in employment gains since 2009 when removing the additions to the monthly employment number though the “Birth/Death” adjustment. Real employment gains would be roughly 5.26 million less if you actually accounted for the LOSS in jobs discussed in the first chart above.”
Think about it this way. IF we were truly experiencing the strongest streak of employment growth since the 1990’s, should we not be witnessing:
- Wage growth rising across the entirety of the employment spectrum rather than an increase primarily caused by mandated minimum wage increases?
- Economic growth well above 3% as 4.9% unemployment leads to stronger consumption?
- A rise in imports as rising consumption leads to demand for goods.
- Falling inventories as sales outpace production.
- Rising industrial production as demand for goods increases.
None of those things exist currently.