FRBSF Economic Letter
2004-23; August 27, 2004
Two Measures of Employment: How Different Are They?
 Since the end of
the 2001 recession, the U.S. economy has performed pretty well
in terms of output growth, averaging about 3-1/4 percent
a year. But how well has the economy performed in terms of creating
jobs? To answer that question, most analysts look at two independent
monthly estimates of employment published by the Bureau of Labor
Statistics (BLS). And the problem is that each sends a different
signal about recent labor market conditions. As Figure 1 shows,
the so-called payroll survey has been reporting a substantial loss
in employment and a slow recovery of labor market conditions, while
the so-called household survey indicates much less of a loss and
a much faster recovery.
How do these two employment measures differ? Which is a more
accurate measure of aggregate employment? This Economic Letter examines
the historical and recent behavior of these two employment measures
to answer these questions.
Two employment surveys
The payroll survey estimates the nation's
employment based on responses from a sample of about 400,000 business
establishments, which account
for about one-third of total nonfarm payroll employment. With a
lag of about one year, the BLS revises the payroll estimate to
an almost-complete count of U.S. payroll employment; this results
in what is known as the "benchmark revision."
The household
survey, in contrast, estimates the nation's employment based on
responses from interviews with approximately 60,000 households;
the BLS then inflates the survey data by the most recent estimates
of the population. Unlike the payroll survey, the raw household
survey data are not revised, but the population estimates used
to inflate them are occasionally updated to incorporate new information
from censuses and new estimates of immigration.
Beyond these differences,
the two employment measures also differ in concept. First, the
payroll survey counts the number of jobs,
while the household survey counts the number of employed individuals.
Therefore, a person with multiple jobs will be counted several
times in the payroll survey but only once in the household survey.
Second, their scopes are different; while the payroll survey covers
only wage and salary workers on nonfarm payrolls, the household
survey covers those individuals as well as agricultural workers,
the self-employed, workers in private households, unpaid family
workers, and workers on unpaid leaves. Finally, payroll employment
includes wage and salary workers under the age of 16, while the
household survey does not.
How much do they differ?
Given these significant differences between
the two measures, it is not surprising that they produce different
estimates for a given
month or quarter. Over the long term, however, they should indicate
similar paths for employment growth, as their various components
should move together with aggregate employment in the long run.
Why,
then, have they remained divergent over the last few years? Some
have argued that the discrepancy may reflect a tendency for
the initial payroll measure to underestimate the number of jobs
in the economy, especially in the early stages of economic upturns;
for example, Hilsenrath (2003) noted that since the survey covers
a fixed set of business establishments, it may miss jobs being
created by startup companies. Indeed, the benchmark revision after
the 1991 recession did show substantially more jobs in the early
months of the recovery. So it is possible that the payroll measure
will be revised up to come closer to the measure of the household
survey.
 This explanation, however, is not, on its face, completely
convincing. Figure 2 plots the difference between the initial releases
and
the revisions for the current recovery (solid thick line), the
recovery after the 1990-1991 recession (solid thin line), and the
average of the four recoveries before 1990 (dashed line); the shaded
area gives the range of all revisions for the four recoveries before
1990, so the top of it is the maximum revision and the bottom is
the minimum revision. The difference is indexed, so positive values
mean that the revision was higher than the initial release, and
negative values mean the revision was lower than the initial release.
Clearly, the initial releases of payroll survey do not always underestimate
employment in the early phases of the recovery. Although on average
the revised level of payroll employment exceeded the initial released
level, in some cases the revisions were lower than the initial
releases, notably during the recoveries from the 1975 and 1980
recessions. Therefore, the widely cited large upward revision to
the payroll data after the 1990-1991 recession might have been
a special case.
Moreover, in 1998 the BLS began phasing in a major
redesign of the survey aimed at improving the accuracy of the initial
releases
of payroll employment and reducing the large and systematic benchmark
revisions. Therefore, the errors arising from missing job growth
in new firms may be much smaller than they were in the recovery
following the 1990-1991 recession. As shown by the dotted line
in Figure 2, the size of revisions during the current recovery
is indeed much smaller than the one after the 1990-1991 recession
and is very close to the historical average level during the recoveries
following the four recessions before 1990.
A closer look at the
household and payroll employment series also suggests that, after
adjusting for definitional differences between
the two measures, the discrepancy between them decreases substantially.
Take September 2003 as an example, when the discrepancy in Figure
1 was the largest. Over the preceding 12 months, the published
nonfarm payroll employment fell by 427,000 while the published
household employment increased by 261,000. Therefore there is a
difference of 688,000 jobs in terms of 12-month employment growth.
However, a closer look indicates that the difference mainly comes
from two sources: the population updates which led to an increase
of 543,000 jobs in the change of household employment, and an increase
of 310,000 self-employed jobs. In other words, after excluding
the population update and the self-employed from the household
survey results, it would show a decline of 592,000 jobs, also indicating
a substantial job loss over the preceding 12 months. More thorough
studies (for instance, BLS 2004) confirm this "back of the
envelope" estimate, finding that, when the household survey
is adjusted to match the payroll survey definition more closely,
the movements of the two series in the past couple of years do
tend to converge.
Which measure is more reliable?
The reconciliation above shows
that both employment measures suggested continued weakness in the
labor market last year. However, their
implications may differ in the long run, and which measure is more
appropriate in assessing the labor market remains a judgment call.
On the one hand, the household survey has drawbacks that may induce
larger biases than the payroll survey. For instance, in the household
survey there are a large number of "proxy responses" by
household members who may have incomplete information on the employment
status of other family members. Moreover, the sample size of household
survey is substantially smaller than that of the payroll survey;
the larger sample size in the payroll survey will undoubtedly help
generate more precise estimates of employment.
On the other hand,
the payroll survey has the drawback of missing job growth that
is occurring at very young companies, including
self-employment, even after the redesign. However, some researchers
have pointed out that this drawback may not be so serious. Rissman
(2003) treats self-employment as a low-paying alternative to
wage work. In particular, workers are assumed to be either employed
in wage work, unemployed, or self-employed and looking for wage
work. During economic downturns, the likelihood of being laid
off
rises and the prospect of finding a job offer diminishes, making
self-employment relatively more attractive; when the job market
becomes more favorable, self-employment becomes less attractive
and the number of self-employed persons declines. Therefore,
self-employment should be countercyclical. Aaronson et al. (2004)
analyze the variations
of unemployment and self employment at the state level since
2001 and find that self-employment indeed was countercyclical in
the
most recent recession: it rose during weak economic times and
declined as the wage and salary sector improved. Therefore, increases
in
self-employment in the early stages of an economic recovery reported
in the household survey may indicate a weak rather than an improving
labor market, suggesting that the household survey may send a
false signal of employment strength.
Tao Wu
Economist
References
[URLs accessed August 2004.]
Aaronson, Daniel, Ellen R. Rissman, and Daniel G. Sullivan. 2004. "Assessing
the Jobless Recovery." Federal Reserve Bank of Chicago, Economic
Perspectives 28 (2nd quarter).
Bureau of Labor Statistics. 2004. "Employment
from the BLS Household and Payroll Surveys: Summary of Recent Trends."
Hilsenrath,
Jon E. 2003. "Job Gauge Skips Key Group: Start-Ups." Wall
Street Journal, September 22.
Rissman, Ellen R. 2003. "Self-employment as an Alternative
to Unemployment." Federal Reserve Bank of Chicago Working
Paper 2003-34 (December).
|
