Friday's employment report, which showed a decline in the
national unemployment rate from 5.7 percent to 5.6 percent, is the clearest
sign yet that the economy may be at a turning point. Although the
unemployment rate reduction garnered most of the press attention, the most
important information was buried in the details.
Few people other than experts know that the Bureau of Labor
Statistics (BLS) collects employment data from two different surveys. One is
collected from households in much the same way that public opinion polls are
conducted. People are asked whether they are working, looking for work or
not looking at all. If they are working or looking for work, they are
considered part of the labor force. If they are neither working nor looking
for work, then they are not.
The unemployment rate is calculated from this survey. The
unemployment rate is simply the number of people out of work, but looking
for work, as a percentage of all people in the labor force. Therefore, the
unemployment rate is a function of both the number of unemployed and the
size of the labor force.
At times, the unemployment rate may rise without any increase in
the number of unemployed, due to shrinkage of the labor force. This may
result because some of those who have been looking for work have given up
and dropped out of the labor force altogether. At other times, the rate may
fall without any decrease in the unemployed, due to an increase in the labor
Economists tend to focus more on the absolute number of people
working, rather than the unemployment rate. This gives a better picture of
the overall state of the economy, because it is not affected by changes in
the labor force. Furthermore, they prefer to focus on data from a second BLS
survey of businesses. Known as the establishment survey, it collects
employment data directly from employers. For this reason, economists believe
it is a more accurate measure of employment.
Despite the better accuracy of the establishment survey,
however, it is not used to calculate the unemployment rate. Only the
household survey is used for that purpose.
Normally, the household and establishment surveys move in tandem
with each other and are a check on each other's accuracy. But there are
times when they diverge, such as now, for reasons that are potentially
The latest employment report shows that there was a net loss of
43,000 jobs in September, according to the establishment survey. However,
the household survey showed an increase of 711,000 jobs. Over the last 12
months, the establishment survey has shown a net loss of 965,000 jobs, while
the household survey has shown a net increase of 181,000.
Economist Brian Wesbury believes that the divergence between the
two measures of unemployment is good news. He notes that the BLS often falls
behind in its establishment survey, because many new businesses are being
formed that are not yet on the survey list. As a consequence, jobs being
created by new startups get missed in the establishment survey.
Eventually, the BLS finds these businesses and revises its data.
For example, in August it initially reported an increase of only 39,000 jobs
in the establishment survey, but has now revised that number up to an
increase of 107,000.
Thus, the fact that the household survey is showing substantial
employment growth may be a better indicator of the economy's condition.
Because the data come directly from workers, these data will not be revised
in the future and are not subject to the sampling problems that may be
affecting the establishment survey.
Wesbury suspects that there are far more new businesses being
established than the BLS suspects, and that these new businesses are the
source of significant employment growth. If that is the case, then the
nation's economic prospects may be brighter than most economists believe.
Historically, the willingness of entrepreneurs to take the risk of starting
a new business is an excellent barometer of future growth prospects.
The political problem is that perceptions lag reality. A new
poll from The New York Times and CBS News confirms that the public still
sees a very weak economy. According to the poll, 39 percent of Americans
think the economy is still getting worse, versus only 13 percent who think
it is getting better. The rest see no change.
A bigger problem is the perception that the Bush administration
doesn't care. Even among Republicans, a majority believes that George W.
Bush is not paying enough attention to the economy. Among all Americans, 69
percent say so.
The administration is in danger of winning the battle and losing
the war. It may be right that the economy is on an upturn and there is no
need for additional stimulus. But as long as the vast majority of Americans
think otherwise, the administration will suffer politically unless it does a
better job of addressing peoples' economic concerns.