The unemployment rate plunged to 6.3% from 6.7%. Let's investigate a peculiar reason why.

BLS Jobs Statistics at a Glance

The BLS reports total nonfarm payroll employment rose by a meager 49,000 in January. Private payrolls only gained 6,000. Manufacturing lost 10,000 jobs. 

The Bloomberg Econoday consensus was an increase of 50,000 jobs. ADP estimated a gain of 174,000 private jobs, missing the mark pretty badly.

Details from the monthly BLS Employment Report.

• Nonfarm Payroll: +49,000 to 142,631,000 - Establishment Survey
• Employment: +201,000 to 150,031,000- Household Survey
• Unemployment: -606,000 to 10,130,000- Household Survey
• Baseline Unemployment Rate: -0.4 to 6.3% - Household Survey
• U-6 unemployment: -0.6 to 11.1% - Household Survey
• Civilian Non-institutional Population: -379,000 to 260,851,000
• Civilian Labor Force: -406,000 to 160,161,000 - Household Survey
• Not in Labor Force: +27,000 to 100,690,000 - Household Survey
• Participation Rate: -0.1 to 61.4% - Household Survey

Initial Reaction

Payrolls are little changed for three months. In fact, they are down from the November recovery peak of 142,809,000 to 142,631,000 in January.

Yet, the unemployment rate plunged. How did this happen?

The Labor Force declined by 406,000. Also, note the population normally rises month-to-month but instead it fell by 379,000.

The BLS made this notice today: "Household survey data for January 2021 reflect updated population estimates." 

Couple the labor force decline with a modest rise in employment (not jobs) and you have a big dip in the unemployment rate.

BLS Error Rate

Since March 2020, household survey interviewers have been instructed to classify employed persons absent from work due to temporary, pandemic-related business closures or cutbacks as unemployed on temporary layoff. As in earlier months, some workers affected by the pandemic who should have been classified as unemployed on temporary layoff were instead misclassified as employed but not at work. However, the share of responses that may have been misclassified was highest in the early months of the pandemic and has been considerably lower in recent months. For March through December, BLS published an estimate of what the unemployment rate  might have been had misclassified workers been included among the unemployed. Repeating this same approach, the seasonally adjusted January unemployment rate would have been 0.6 percentage point higher than reported. However, this represents the upper bound of our estimate of misclassification and probably overstates the size of the misclassification error. 

According to usual practice, the data from the household survey are accepted as recorded. To maintain data integrity, no ad hoc actions are taken to reclassify survey responses.

I strongly question the accuracy of the BLS assertion that 0.6% is the high end of their error rate.

Also, note the rise this month to 0.6% is up from 0.3% a few months ago. The trend in the error rate has been rising.

Job Revisions

• The change in total nonfarm payroll employment for November was revised down by 72,000, from +336,000 to +264,000
• The change for December was revised down by 87,000, from -140,000 to -227,000. 
• With these revisions, employment in November and December combined was 159,000 lower than previously reported.

Part-Time Jobs

• Involuntary Part-Time Work: -216,000 to 5,954,000
• Voluntary Part-Time Work: +282,000 to 18,519,000
• Total Part-Time Work: +301,000 to 24,627,000
• Total Full-Time Work: -292,000 to 124,990,000

Employment Reporting Silliness

These numbers never add up correctly. I list them as reported.

Unemployment Rate – Seasonally Adjusted 

Nonfarm Payrolls

The above chart puts a much needed perspective on the recovery.

• Jobs are up 12,470,000 from the lows.
• Jobs are still 9,892,000 from the pre-covid highs

Hours and Wages

Average weekly hours of all private employees rose by 0.3 hours to 35.0 hours. Average weekly hours of all private service-providing employees rose by 0.2 hours to 33.9 hours. Average weekly hours of manufacturers rose by 0.3 hours to 40.4 hours.

Those increases are artifacts of declining labor force.

Average Hourly Earnings of All Nonfarm Workers rose $0.06 to $29.90.

Year-over-year, wages rose from $28.43 to $29.96. That's a gain of 5.4%.

The month-over-month and year-over-year gains are very distorted because more higher-paid workers kept their jobs than lower-paid employees.

Average hourly earnings of Production and Supervisory Workers rose $0.03 to $25.18.

Year-over-year, wages rose from $23.88 to $25.18. That's a gain of 5.4%.

Again, these numbers are hugely distorted as more lower wage workers lost their jobs than higher ones.

For a discussion of income distribution, please see What’s “Really” Behind Gross Inequalities In Income Distribution?

Birth Death Model

Starting January 2014, I dropped the Birth/Death Model charts from this report.

For those who follow the numbers, I retain this caution: Do not subtract the reported Birth-Death number from the reported headline number. That approach is statistically invalid.

BLS Covid-19 Statement on the Birth-Death Model

The widespread disruption to labor markets due to the COVID-19 pandemic and the potential impact to the birth-death model have prompted BLS to both revisit research conducted in the aftermath of the Great Recession (2008-2009) and incorporate new ideas to account for changes in the number of business openings and closings. Two areas of research have been implemented to improve the accuracy of our birth-death model in the CES estimates. These adjustments will better reflect the net effect of the contribution of business births and deaths to the estimates. These two methodological changes are the following:

1: A portion of both reported zeros and returns from zero in the current month from the sample were used in estimation to better account for the fact that business births and deaths will not offset.

2: Current sample growth rates were included in the net birth-death forecasting model to better account for the changing relationships between business openings and closings.

BLS will determine on a monthly basis if the adjusted birth-death model described here continues to be necessary. We will disclose these changes each month in the Employment Situation news release. All months in the tables of net birth-death forecasts on this page include footnotes for any month in which a regressor was used to supplement the forecasts.

The Birth-Death model is essentially garbage but we likely will not find how distorted this is until the annual revisions next year.

Table 15 BLS Alternative Measures of Unemployment

(Click on image to enlarge)

​Table A-15 is where one can find a better approximation of what the unemployment rate really is.

The official unemployment rate is 6.3%. However, if you start counting all the people who want a job but gave up, all the people with part-time jobs that want a full-time job, all the people who dropped off the unemployment rolls because their unemployment benefits ran out, etc., you get a closer picture of what the unemployment rate is. That number is in the last row labeled U-6.

U-6 is much higher at 11.1%. Both numbers would be way higher still, were it not for millions dropping out of the labor force over the past few years.

Some of those dropping out of the labor force retired because they wanted to retire. The rest is disability fraud, forced retirement, discouraged workers, and kids moving back home because they cannot find a job.

Strength is Relative

It’s important to put the jobs numbers into proper perspective.

In the household survey, if you work as little as 1 hour a week, even selling trinkets on eBay, you are considered employed.

In the household survey, if you work three part-time jobs, 12 hours each, the BLS considers you a full-time employee.

In the payroll survey, three part-time jobs count as three jobs. The BLS attempts to factor this in, but they do not weed out duplicate Social Security numbers. The potential for double-counting jobs in the payroll survey is large.

Household Survey vs. Payroll Survey

The payroll survey (sometimes called the establishment survey) is the headline jobs number, generally released the first Friday of every month. It is based on employer reporting.

The household survey is a phone survey conducted by the BLS. It measures unemployment and many other factors.

If you work one hour, you are employed. If you don’t have a job and fail to look for one, you are not considered unemployed, rather, you drop out of the labor force.

Looking for jobs on Monster does not count as “looking for a job”. You need an actual interview or send out a resume.

These distortions artificially lower the unemployment rate, artificially boost full-time employment, and artificially increase the payroll jobs report every month.

Recovery Will Take Years

The economy has added 12.5 million jobs since the April lows.

However, jobs remain 9.9 million jobs below the February 2020 peak. Millions of those jobs will not return.

There has been no progress since November.

The improvements are welcome but huge headwinds remain.

This recovery will take years, especially airlines and travel.

Other losses are permanent due to a surge in work-at-home and online shopping (less office space and malls needed).