Thu. Jan 27th, 2022

The U.S. government has significantly underestimated the number of jobs created this year, as it has struggled to analyze data distorted by the effects of the pandemic, creating new challenges for policymakers navigating a highly volatile economic environment.

Over the course of 2021, the government agency that releases the monthly U.S. job statistics revised its initial estimates of salary growth upward by a total of 976,000 jobs, the highest such adjustment in a single year.

Reviewing previous estimates to account for new data is a routine exercise: the initial estimate calculated by the Bureau of Labor Statistics (BLS) is updated twice, with the second estimate published in next month’s work report and the third estimate published the following month. .

However, it is during major economic inflection points that these numbers are not only the most difficult to measure, but also the most closely monitored. This means that data revisions, which are typically published without fanfare, suddenly have the potential to fundamentally change perceptions of labor market health and in turn how precisely policies need to be refined.

“The economic fundamentals have shifted at unprecedented speeds. Not in my lifetime and not in the lifetime of most people living today we have seen. . . an economic recovery that has been as rapid as it has been since the spring of 2020, ”said David Wilcox, who previously headed the research and statistics department at the Federal Reserve. “The challenges of economic measurement in a pandemic environment are enormous.”

Bigger economic revisions in turbulent times

The pandemic provided unique thorny evidence for economists looking at the U.S. labor market, as it not only caused delays in data reporting, but also distorted the seasonal rhythms typically included in estimates. The sheer extent of wage growth during the economic recovery has also created challenges.

“You take an already difficult task and make it absolutely Herculean,” says Ernie Tedeschi, a senior economic adviser to the Biden administration as a member of the Board of Economic Advisers.

This difficulty was once again seen in the latest work report published on December 3, which showed only 210,000 new jobs created in November. The unemployment rate further tumbled to 4.2 percent, a far cry from the nearly 15 percent level reached last year.

The numbers have been economically confusing, not least because of a significant gap between the two surveys that make up the monthly report. The “establishment” survey of businesses, from which the main figure subject to revisions is derived, suggested a sharp slowdown in recruitment. The “household” survey of individuals, which was used to calculate the unemployment rate, showed a profit of 1.1 million.

To further complicate the picture, the BLS has extensively updated its September and October numbers, bringing September’s earnings to 379,000 and October’s to 546,000. Altogether, about 6 million jobs were reclaimed in 2021.

“Everything was so much bigger than it was before,” says Stephen Crestol, an economist who has spent more than three decades at the BLS. “A big drop and big rises, we are not used to it.”

The task of estimating payroll numbers during the pandemic was complicated by two primary factors. First, an increasing proportion of businesses are submitting their survey responses late.

The agency was having trouble signing up businesses during the pandemic for the establishment survey, Crestol said. Participation, which is voluntary in all states except three, has halved since last February.

Bullet bar graph showing record high upward revisions to initial job growth estimates in 2021

Even if businesses agree to complete the survey, their responses can be included in the work report after the initial estimate deadline, which is released on the first Friday of the month.

For the November report, 65.3 percent of businesses answered over time, the lowest rate for a November report in more than a decade.

To produce the first digit, the BLS calculates an expected payroll number for businesses that have not yet responded. Late answers are included in subsequent reviews.

“In a normal month, you do not get as much change in the bottom line,” said Cornell University’s Erica Groshen, the former BLS commissioner. But in a year like 2021, marked by an intensely rapid economic recovery, the companies that respond the slowest can recruit the fastest, she said, leading to greater upward revisions.

Seasonal adjustment factors have also made job growth polling a difficult task.

Economists look closely at the “seasonally adjusted” figures, as they are likely to provide the most direct view of continuing trends once regular fluctuations in the data linked to events such as the start of the school year are stripped away.

For example, retail businesses reported 331,600 more people on payroll in November compared to October. But the BLS adapted that number is down, as recruitment in the retail sector tends to increase just before the start of the holiday season. The agency reported that the sector “lost” 20,400 jobs after seasonal adjustment was taken into account.

In total, the raw numbers showed payroll growth of 778,000 in November, which the BLS adjusted downward by 568,000, a record revision.

“The seasonal patterns are not a kind of law, they are just patterns,” said Betsey Stevenson, a professor of economics at the University of Michigan and a member of the CEA during the Obama administration. “Covid did more to disrupt our patterns than anything I could have imagined.”

Seasonal factors are based on data from the past 10 years, with more weight given to recent years. In 2020, there were many movements considered outliers and not included in the adjustment model.

The model is constantly being updated as new data comes in, leading to more revisions. “You get more data, then it affects your understanding of previous seasonal trends,” says Nick Bunker of work site Indeed.

How the new coronavirus variant unfolds will determine whether the recent waves of review are going to creep in or get bigger from here.

The implications are enormous for the US central bank, which is the employment situation for the green light to tighten monetary policy next year. Christopher Waller, a governor, said the Fed has already supplemented its models with high-frequency data and other sources, including the weekly ADP employment report.

“The more we see going on, just recovering from a recession, the better the statistical techniques are going to work,” Groshen said. “The more it is driven by a new variant and a different policy response to it. . . the more the models can fail because they are based on the past. ”

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