January 19, 2004
by Irwin Stelzer
If you want to know why ordinary folks find it difficult to understand what economists are saying about the American economy, consider the question of jobs. We know a few things. We know that jobs are such an emotive political issue that one candidate for the Democratic presidential nomination promises that if elected his three top priorities would be, “jobs, jobs, jobs.”
And we know that when there is slack in the labor market, upward pressure on wages is reduced. This allows Alan Greenspan and his monetary policy colleagues at the Federal Reserve Board to declare inflation under control and to keep a lid on interest rates.
Finally, we know that when GDP is growing, as it now is, but the number of jobs isn’t, each worker must be producing more, driving up productivity. Indeed, we are being told that output is rising so fast, and new job creation is so low, that we are in the midst of “a productivity miracle,” a wondrous trend that assures higher profits, continued low inflation, and a long period of economic growth.
The trouble is that no one seems to have a clear, unambiguous picture of what is going on in the jobs market. And with good reason. The U.S. Department of Labor regularly surveys employers to ask how many people they are hiring, and how many they have laid off. It also surveys households to find how many people say they are in work. Any sensible person would expect the results of these two surveys to be more or less the same: if employers are hiring, more households should be reporting that their members are finding jobs.
Alas, the world of economic statistics is not so straight-forward. In the past year, employers reported a net loss of over 70,000 jobs, while households reported a net gain of over two million. Believe the second figure. Here’s why.
The survey of employers, which is the more widely reported of the two, is so bleak because of the way it is designed. Assume, for example, that a factory employs some 3,000 workers making widgets, and 300 workers in the on-site canteen. Management decides to outsource the food service. When this employer next responds to the employment survey, he will report a job cut of 300 and, best of all, that he is now producing all of the widgets that he once produced with a workforce of 3,300, but using only 3,000 workers–a bogus productivity miracle.
Even more misleading is the fact that the new firm formed to handle the canteen catering is not picked up in the employment survey, which does not cover new firms or the newly self-employed.
Turn now to the household survey. The canteen worker reports that he most certainly has a job, even though it is with a new employer. And if the new catering firm upgrades the quality of the fare on offer, so that fewer workers bring their own homemade lunches, forcing the caterer to add workers, those newcomers to the job market will not be picked up in the employment survey, but will be recorded in the household survey.
Clear? Surely clear enough for the president’s men to be able to rebut the charge that he has presided over the most massive reduction in jobs since Herbert Hoover presided over the Great Depression. But they just can’t. Instead, they act as if the reports of massive job losses are true, and adopt a loose fiscal policy appropriate in periods of high unemployment.
Which is why the American economy may be heading for a bit of turbulence later this year. The red ink flows, and reports that Bush will stanch the flow in his next budget by persuading congress to control spending should be accorded all the weight we generally ascribe to campaign rhetoric.
Meanwhile, Greenspan has done everything but give his word not to raise interest rates this year, prompting economists at Goldman Sachs to conclude, “We believe that the monetary authorities will be patient and will not tighten monetary policy in 2004.”
If red ink and low interest rates are not enough to encourage the inflation genie’s thoughts of escape from its bottle, it can find added cheer from the currency and oil markets. The shrinking dollar will eventually make imports more expensive, giving domestic manufacturers a bit of room to raise prices, and the OPEC oil cartel will do its bit by curtailing production so as to keep crude oil prices above the $28 per barrel ceiling it once promised to honor.
Meanwhile, the number of jobs will continue to increase. But not in the usual way. In the past, workers have been laid off when business was slow, and rehired—usually by the same employer—when things picked up. That’s what the classic business cycle was all about. A new study by Erica Groshen and Simon Potter at the Federal Reserve Bank of New Yorkconcludes that we are now witnessing structural rather than cyclical shifts in the job market. Most of the industries that have lost jobs are not likely to regain them; new jobs are coming from entirely different industries. This puts pressure on workers to relocate and retrain, rather than simply wait for business to return in their old industries.
That can be a painful process. But it apparently is not so widespread as to dampen Americans’ spirits. Ninety-five percent of Americans tell Galluppollsters that they are “very happy” or “fairly happy”, prompting the polling organisation to conclude, “Americans’ subjective sense of well being is as high today as at any time in the history of these Galluptrends.” Which may be the final proof that the household survey is a better indicator of what is going on in the jobs market than is the employment survey.
This article appeared in London’s Sunday Times on January 18, 2004.
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.
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