Counting Jobs
The Bureau of Labor Statistics (BLS) just provided a preliminary reduction of 818,000 payroll jobs in its preliminary annual estimated benchmark revision through March 2024. The revisions realign the small sample establishment survey, which is inherently less accurate, with broader, more complete data on the job market. But this time around, the broader data may have its own distortion that resulted in a sizable undercount of workers. So, we think the downward revision is too large, possibly dramatically too large.
The monthly payroll report is widely considered one of the most insightful, accurate and timely economic reports distributed by the government. BLS surveys almost 120,000 firms of varying sizes and scales up that data to estimate job gains for the entire economy. It is subject to a number of sampling errors that are reasonably well understood and BLS tries to adjust for those known biases. Even so, since all of this is based on sampling, every estimate will deviate from actual job growth by some unknown amount. And over time, inaccuracies can grow if the distortion includes unknown systematic errors. That’s the nature of any survey. It is much like poll surveys in an election year. Each poll will capture how people will vote, plus some amount of error in either direction, plus those surveys may capture with some degree of inaccuracy how voters preferences evolve over time. The truth comes out on election day only when the total voter tally becomes available. The same is true for job growth.
Annually, BLS uses state unemployment insurance tax payments, which are much more comprehensive, to benchmark the monthly establishment survey. This helps correct those systematic errors that creep into the monthly reports. Every 10 years, another recalibration is made using census data, which are intended to be even more comprehensive.
State unemployment insurance payments are required of all firms for each employee to cover the cost of unemployment insurance, so states have the funds to cover unemployment insurance outlays when workers lose their jobs. But not all workers work on the books. If someone is working off the books, the company may or may not be making tax payments on their behalf, more likely not. BLS reduced its estimate of total employment by 818,000 because its monthly job count estimate exceeded the insurance payments by that number. But were that many fewer people working or were that many workers taken off the count because they were working off the books? Keep in mind that the U.S. saw roughly 2.5 million illegal immigrants cross the border in 2023, with roughly two thirds being of working age. Since many of those illegal immigrants came to the U.S. in search of a better life and most could not afford to sit around idle waiting to become legal, it seems very likely that most of those people took jobs somewhere. If just half of them worked off the books, they would account for the entire decline in BLS’s revised estimate of jobs. Moreover, BLS estimates from the household survey (different from the establishment survey) that the foreign-born population increased by about 2.2 million over the past twelve months, and the foreign-born employed rose by about 1.3 million. In contrast, BLS estimates that the native born employed declined by about 1.1 million. It is entirely plausible that illegal immigrants working off the books accounted for the entire downward revision to employment.
A number of preliminary conclusions emerge from this analysis. First and most importantly, it is likely that BLS’s downward revision of jobs is too large. It is even possible that when comprehensive census data becomes available, the job estimate will be revised higher. Second, even taking the new job estimates at face value, it remains clear that job growth remains quite solid. Since domestic demographic trends imply roughly 50,000 to 100,000 new entrants into the job market, the “revised” monthly estimate of job growth of “only” 174,000 remains well above what can be sustained by the domestic economy. That difference was made up and made possible only by legal and illegal immigrants. Third, illegal immigration represents a sizable tailwind to the economy. Not only does it represent an incremental source of labor to an economy that is still trying to hire, enabling firms to expand, it also represents an incremental source of demand, since those immigrants must buy goods and services just like everyone else. They contribute to economic growth. Fourth, the implications for inflation and Fed policy are a bit more ambiguous. The influx of workers helps keep wage inflation down, while their incremental demand promotes growth, which keeps the labor market tight. It would be risky, and likely inappropriate, to infer that BLS’ new slower estimate of job growth implies the U.S. is closer to recession or that job growth is moderating enough to help bring down inflation. Lastly, the downward revision to payroll employment doesn’t imply upward or downward revisions to other key economic statistics, which are each based on other collection methods. For example, retail sales and consumer spending estimates are derived from sales reports, not from payroll data. So, our sense of economic growth and inflation remain unchanged.
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