The Envelope Please: NBER Study finds ratio between Establishment and Household Surveys to the Cyclical
NBER has just released a working paper, "Exploring Differences in Employment between Household and Establishment Data," that presents research and analysis carried out by the Census Bureau and the BLS concerning the unusually large gap between the two major employment surveys that developed in the late 1990s. By matching individual Unemployment Insurance records with individual respondents in the Household Survey, the authors unearthed characteristics of the workers most likely to show up in one survey yet be missed in the other, and conclude that most of these workers are on the margins of the income and education spectra. For example, poor recent immigrants working under the table and highly educated consultants might both be missed by the Establishment Survey but included in the Household Survey.
But that example should not give Household Survey enthusiasts false hope. The study demonstrates that divergences between the Current Employment Survey (aka the Establishment Survey or Nonfarm Payroll) and the Current Population Survey (aka the Household Survey) are "cyclical phenomenon," with the CES outpacing the CPS during business-cycle expansions, and then falling back during recessions and the early stages of recoveries. The 60-year history of the ratio between the two surveys graphed below shows this clearly. (Take that, Kudlow & Co.) Also note that the ratio failed to rise during the most recent recovery, which seems to underscore the ongoing weakness in terms of employment growth.
Based on characteristics of respondents discovered in their study, the authors contend that tight labor markets create a growing number of marginal jobs that often go unreported in the Household Survey, e.g., establishments hiring short-term workers to cover busy periods, which begins to lift the Establishment Survey. As economic conditions continue to improve, workers tend to drop informal jobs (which would be reported in the CPS but not the CES) for formal jobs (that would be reported in the CES), thus widening the gap between the two surveys. These trends then reverse as economic activity falls off, with establishments laying off workers who then turn to informal employment, moving from the CES to the CPS. The graph of the two series since 1994 directly below illustrates this process.
The unusually large and long-lived gap between the two surveys began in 1998 as the Establishment Survey rose well above the Household Survey, and reversed in 2001, when the Household Survey remained stable as the Establishment Survey fell. The relative pick-up in the Household Survey that got so much attention in the press was the unwinding of the prior trend and not the beginning of a new one. To put some numbers on it, in comparing UI and CPS data the authors found that jobs counted in the UI but not in the CPS grew by 2.3 million between 1996 and 2001, while jobs counted by the CPS and not by the UI grew by just 600K. Between 2001 and 2003, jobs counted by the CPS but not the UI grew by 800K, while jobs counted in the UI but not the CPS fell by 500K.
So next time any of us, understandably, seeks solace in the Household Survey’s strength when the Payroll Survey disappoints, we need to remember that NBER researchers, who are responsible for officially calling recessions, have determined that such relative strength is indicative of a weakening economy.
NBER Working Paper No. 14805, issued in March 2009, "Exploring Differences in Employment between Household and Establishment Data," by Katharine G. Abraham, John C. Haltiwanger, Kristin Sandusky and James Spletzer, available here (subscription required): http://www.nber.org/papers/w14805.pdf