Which Unemployment Survey is Better?

As a follow up to my post about the two employment surveys, it is often asked which report is better. The CES seems to be conventionally preferred. And research by George Perry, among others, finds evidence of a preference among traders and central bankers for the CES estimates. The CES surveys businesses, rather than households, to measure non-farm payroll employment, and has a larger sample size and less monthly volatility than the CPS. 

But the CES has the added complication of needing a representative sample of businesses, which are created and fail all the time. The BLS gets around this by adjusting the sample periodically using Unemployment Insurance tax data, which is collected for nearly all payroll employees. They also use models to predict business creation and failure to inform sample adjustment. The answer of which one is better is “it depends”.

Both surveys overlap in that they produce employment, hours, and earnings data, but they also measure things that the other survey does not. The CPS measures the size of the labor force, and its composition. It also collects demographic information on the employed and unemployed, whereas the CES does not. That data is needed for calculating the unemployment rate. The CPS does not exclude the self-employed or farm workers.

It also depends on how quickly data is needed. Much of the volatility of the CPS diminishes when averaging across quarters or years. Perry finds that when using quarterly employment data to track changes in GDP, an average of the two series performs better than either on its own. William Wascher uses the first month’s employment report for each quarter to get at monthly accuracy[1]. He finds that an average of the two series does as well as the CES on its own, and both do better than CPS on its own[2].

So it depends on what data is needed, over what time period, and how soon after release it is needed. But if I had to pick which survey is best for estimating what last month’s change in employment was, I’d argue for the CES. If you want a more holistic look at the labor market over any longer period of time, either survey by itself leaves you with an incomplete picture.

Just got a Smartphone

I just got a smartphone; it's harder to text with. Sometimes the auto-correct doodle guesses right and that's cool. But the first time I typed in "im", which it correctly made into "I'm", the next word that was the phone's first guess at what my next word would be was "sorry". Listen phone, sorry I'm not sorry, and you better learn that.

The Two Employment Surveys

The BLS produces two main monthly employment reports, taken from different surveys. One, the Current Economic Statistics (CES), or Establishment Survey, estimates the change in non-farm payroll employment. The other, the Current Population Statistics (CPS), or Household Survey, estimates the change in the size of the labor force and employment. Information from the CPS is used to generate the unemployment rate. Both surveys exclude those committed to institutions, such as prisons and mental health facilities, and the military.

The CES surveys around 140,000 businesses each month. But it does not capture those who are self-employed, working under the table, or on unpaid leave during the sample period. An individual with more than one job will show up on multiple payrolls. An individual who works two part time jobs, but gives up one to work full time would show up as a net loss of one payroll job.

An issue arises from the fact that businesses are created and fail all the time. Without proper accounting of business creation and failure, the CES's sample will become less representative over time. The BLS attempts to correct for this in its benchmarking process, where they use more accurate UI tax data (available bi-annually) to adjust the sample. They also use econometric models to predict business creation and failure to adjust the sample between benchmarks.

The CPS surveys 60,000 households each month to estimate the size of the labor force, employment, weekly hours, earnings, and demographic information. The labor force is defined as individuals who are employed or unemployed – those who are not employed but have actively looked for a job within the past month.. Those who are self-employed, farm workers, or unpaid workers in a family business are included in the CPS. The CPS has a smaller sample size than the CES, and is more volatile from month to month.

Due to its larger sample size and lower volatility, the CES is often considered to be the more accurate source. But the relative usefulness of the two sources depends on what data is needed, as well as when and for what time period. Much of the relative monthly volatility of the CPS is removed by averaging over a quarter or year. And less volatility is not necessarily a sign of greater accuracy. Both series often go through large revisions.

What caused the Great Recession? (or recessions in general)

This is kinda an important question, with a lot of different theories to answer it. Some theories offer a solution, but one in particular offers none. Years ago Paul Krugman called it the “hangover theory”. It's the idea that a boom must inevitably cause a bust, and any attempt to alleviate it will only delay the inevitable recalculation. As Krugman puts it himself in a piece you should read in its entirety (from 1998):

“In the beginning, an investment boom gets out of hand. . .Whatever the reason, all that investment leads to the creation of too much capacity—of factories that cannot find markets, of office buildings that cannot find tenants. Since construction projects take time to complete, however, the boom can proceed for a while before its unsoundness becomes apparent. Eventually, however, reality strikes—investors go bust and investment spending collapses. The result is a slump whose depth is in proportion to the previous excesses. Moreover, that slump is part of the necessary healing process: The excess capacity gets worked off, prices and wages fall from their excessive boom levels, and only then is the economy ready to recover. . .this is not a bad story about investment cycles. . . But let's ask a seemingly silly question: Why should the ups and downs of investment demand lead to ups and downs in the economy as a whole?”

Krugman goes on to point out that the fact that they are highly correlated is not a theory; a theory is causal. It's disturbing how little this question is asked among economists. I've taken numerous classes that take it as a given that if investment demand falls so does the economy as a whole, without ever explaining why. When an explanation is offered, it is usually that there is some friction in the transfer of workers out of one sector to another, such as out of housing construction and into whatever. But that doesn't answer the question of how a housing bust, which started in 2007, led to a world-wide crisis in late 2008. And if that's true, Krugman asks, why doesn't the boom cause frictional unemployment as workers transition from one sector to another? Then comes one of the best comments in the theory of recessions I've read:

“As is so often the case in economics, the explanation of how recessions can happen, though arrived at only after an epic intellectual journey, turns out to be extremely simple. A recession happens when, for whatever reason, a large part of the private sector tries to increase its cash reserves at the same time.”

The housing bust caused that increase in private demand for money, the failure to adjust the money supply to the change in demand caused nominal GDP growth to crash causing the crisis that started the Great Recession. I kinda like the part about “only after an epic intellectual journey”. I felt like I was grasping at this conclusion for a while but with only partial understanding and somewhat recently have come towards the end of that journey. Sure the trend rate of real GDP growth can't be affected by the money supply in the long run: one is a nominal variable and the other real. But recessions are short run deviations of lower than trend growth, and those can be made less severe by adjusting the supply of money to movements in demand. Generally, the determinants of the trend for long run real growth are real, the determinants of short run fluctuations from that trend are nominal.

Remittances to Somalia

A few years ago the United States put stricter regulations on the sending of money abroad in a process known as remittances, out of concern that money may end up in the hands of extremist groups. Remittances are money that immigrants in a rich country send back home to their families. The flow of remittances worldwide is huge; the World Bank estimates they will be about $500 billion in 2015. Around $1.6 billion of that annual total goes to Somalia, a larger amount than foreign aid and investment. According to the UN, nearly 40% of Somalis receive remittances, in a country where GDP per capita is around $1000. Remittances are an economic lifeline for families who have relatives working in rich countries, and are an important factor in the positive benefits of migration.

In February, the last US bank handling transfers to Somalia stopped providing the service, citing US bank regulations, effectively cutting off every Somali who receives money from relatives in the US. This is a huge blow to the Somali economy, and will put millions further into poverty. The reason for the regulations is to prevent transfers to terrorist groups, such as Al-Shabab. But such groups have illicit sources of financing, and some degree of networks in multiple countries. The average Somali has no other options. It is unknown to what extent if any terrorist groups in Somalia are financed this way, making the benefits, if any, highly uncertain against high and certain costs.

Not to mention that increased poverty is a threat to well-being itself. Without resources, more Somalis may be pushed into the arms of extremist groups or militias that can provide them with some level of income or resources. Poverty is fertile ground for violent extremism. The intent of the regulations was to make people safer by defunding terrorist groups. The effect is to increase poverty, and reduce safety. It is a cautionary tale about judging regulation by its intent rather than effect.

Fortunately Somali-American groups in the US, and their representatives, have been pressuring the US to revise the relevant banking regulations. Supposedly remittance services will become available again to Somali-Americans this month; it can’t happen too soon.

November and December Jobs Report

Jobs reports have been consistently good recently. 252 thousand jobs were added in December; October and November were both revised upwards from previous estimates. It's starting to not be interesting to pay attention to the job numbers. GDP growth in the US isn't doing bad either, but the rest of the world seems to be slowing.


But as far as looking at job figures as an indicator of growth one must keep in mind the theory of the Natural Rate of Unemployment. This holds that there is some rate of unemployment that is inevitable: caused by things such as people choosing to switch jobs, or put out of work by technological changes for example. This is different from unemployment caused by cyclical short run changes in Aggregate Demand. The theory holds that in the long run wages and prices will adjust to any cyclical variation and unemployment will return to the natural rate. In the short run prices and wages are sticky, so this takes time. The take away lesson is that unemployment should fall to more normal levels regardless of economic growth performance, so long as the contraction stops. The result is lower unemployment from people taking jobs that they would not have before, or at lower real pay and such things. The reality isn't that bad, but such an adjustment is certainly at work in some proportion.