March 29, 2004



Donald R. Byrne, Ph.D.


Associate Editor

Edward T. Derbin, MA, MBA



Note: To print a hard copy of this newsletter, click on the following link for a PDF download…

Newsletter Volume 2004 Issue 2 Complete.doc






Jobless Recovery - - - a bogus issue?





There are two monthly unemployment surveys taken by the Bureau of Labor Statistics (BLS), one that is geared toward more traditional companies – the Establishment Payroll Survey (Current Employment Statistics (CES) Survey), and the other more inclusive Household Survey (Current Population Survey (CPS)).  The surveys and the extent of what they measure (or do not measure) are at the heart of the controversy. 


The reader should be aware that the two surveys are constantly under revision and review and both serve distinct and important purposes.  This is not a new issue – the editor of this newsletter was present for a meeting at the Federal Reserve Bank of Chicago a decade ago where issues relating to the Establishment and Household Surveys were discussed for several hours. 



The Establishment/Payroll Survey (Current Employment Statistics (CES) Survey)


The Establishment Survey is specifically geared to capture and measure statistics related to nonfarm wage and salary jobs.  Employers submit monthly forms (400,000 business establishments nationwide), which include various data concerning hours worked, workforce changes (hires, lay-offs), etc. – a remarkable amount of useful information compiled for determining and analyzing productivity, hours worked, payroll, industry-specific details, etc. (  In short, it is a useful, yet limited tool because it ignores a significant portion of the workforce.  This is due (at least in part) to its linkage/relationship with state unemployment agencies.  The survey is reconciled annually by matching it up against unemployment insurance figures.  Since the following categories fall outside of that metric, it is not useful as a tool for measuring the unemployment rate.


Excluded from private sector unemployment insurance coverage in 2001 were approximately:



Number (in millions)

Wage and salary agricultural workers


Self-employed farmers


Self-employed nonagricultural workers


Domestic workers


Unpaid family workers


State and local government workers


Railroad workers





From BLS: February 5, 2003

*(8% of the Civilian Labor Force; Civilian Labor Force = 143.7 mil in 2001)


The problem arises from the fact that the data found in the Establishment/Payroll Survey, while limited, is much more inclusive (in a sample size / raw number sense) than the Household Survey.  The red flag (for the editors of this newsletter) went up last year as weekly first time jobless claims data** were such that the job growth should have been 75,000 or more from around August onward. 


The bottom-line is that the public is shown monthly job growth/loss numbers derived from data using the Establishment Payroll Survey (Current Employment Statistics (CES) Survey) data.  This is an (accurate for the sample measured – nonfarm employment) incomplete employment picture for the population at large. 




In the following graph, note that despite migration into and out of the Establishment Payroll Survey (CES), the overall employment change relates a different story (keep an eye on the top of the bar)…





**Note: rule of thumb – new jobless claims of 400,000 a week or less are an indicator of job growth.  Weekly averages have been running around 374,000 since the beginning of the August 2003.  This is what the analysts have been using (until recently) to forecast the monthly job growth/loss.  Using the 374,000 weekly average the economy should show net job gains of close to 800,000, or 114,000 per month.  The CES Survey shows 339,000 jobs growth from August 2003 – February 2004, while the CPS Survey shows 697,000 jobs added over that same time frame.


The Household Survey (Current Population Survey (CPS))


As noted above, the Establishment/Payroll Survey focuses on (in general) larger, more traditional entities, while the Household Survey (Current Population Survey) queries 60,000 households individually and directly on a monthly basis.  At issue is that while the Establishment/Payroll Survey captures data from 400,000, multi-employee entities, many smaller, newer (non-traditional) firms (including self-employed) are outside of its measuring capabilities. 


Due to the nature of this recovery, it has failed to capture the job growth noted in the more inclusive Household Survey.


Since the Household Survey draws from a much smaller sample size (60,000 households), it has been viewed as less reliable than the Establishment Survey (as indicated throughout, this is an ongoing process that has been at issue for at least two decades).  The BLS has made great strides in the effort to bring the Household Survey in line with the Establishment Survey. Just recently published on March 5, 2004, the following comparison of the two surveys indicate how much progress has been made in bringing them in to line


In essence, the Establishment Survey continues to measure a smaller portion of the Civilian Labor Force.  Meanwhile, the more inclusive Household Survey has been shown to be a reasonable mirror image of the Establishment Survey, while capturing a more complete and comprehensive portion of the Civilian Labor Force. 




Comparison of Payroll Survey (CES) and the Household Survey (CPS)

Published by BLS: March 5, 2004






In effect, the Household Survey is showing that there are many people that are beyond the realm of the Establishment Survey (by choice or by restructuring).  These people are working and earning income, but as previously indicated are not showing up in the Establishment/Payroll Survey.


Since the BLS has and continues to show job growth/loss in terms of the Establishment Survey, there will continue to be a discrepancy as to what the total change is. 


The Establishment Survey is a great tool for measuring productivity, industry and payroll statistics, but it does not (currently) do a very good job of measuring job growth/loss for the entire Civilian Labor Force.  The Household Survey is a much better measure of employment level than is the Establishment Survey and that is why the BLS continues to use it to measure the unemployment rate. 








Since it has been shown that the Establishment Survey as a subset of the Household Survey are virtually mirror images, it is important for the public to be aware of the validity of the Household Survey in relation to job growth/loss.  Our guess is that the BLS will be doing just this in the upcoming months.  They’ve established that the Household Survey is accurate.  They’ve shown how the Establishment Survey misses a significant portion of the population in its coverage (the Establishment Survey is perfectly fine for measuring job growth/(loss) in the smaller subset).  It makes perfect sense for the public to be made aware of job gains/(losses) with numbers derived from the Household Survey.  








2001-2003: In spite of what has been reported, overall job growth for that period was 803,000 (22,300 jobs per month).







Please look at the following links for further discussions on unemployment…


Joint Economic Committee September 26, 2003


Employment Summary


Employment and Wages, Annual Averages 2001


March 5, 2004 (Employment from the BLS household and payroll surveys)


Labor-Market Conditions (Jobless Claims: 400,000 or less – indicating job growth)







First the households…


A recurring theme in the media, especially during campaign season (that’s pretty much all the time…reminds one of professional sport), are the much-maligned and often misapplied terms – deficit and debt.  The media and politicos have given them such a pejorative aura that the public often turns a deaf ear to any useful analysis.  The resulting confusion is probably also due to the fact that most people have never had a course in either accounting or finance.  This includes many that have gone to college. 


The fact of the matter is that neither of the terms necessarily implies good or bad behavior.  It is the way the deficit or debt is used that really matters.  If a household buys more consumer goods and housing than its cash inflow warrants, it must borrow or incur a deficit as a budget unit. Going into debt, or incurring a deficit to sustain its level of expenditures on food, clothing, transportation, etc., is not a bad thing in and of itself.  For the household, it does of course depend upon the flow of benefits from these assets and their ability to service the debt. 


Franco Modigliani, a Nobel Laureate in Economics wrote of a Life Cycle Hypothesis.  His research showed that younger households incur a cash deficit and accumulate a debt, in order to build their family and its necessary infrastructure.  As they age they run smaller and smaller deficits.  Once middle aged, the households begin to run surpluses, paying off debt previously accumulated and building up investments that will carry them through retirement.


Nearly every year, the older householders incur surpluses that out weigh the deficits of younger households and as a consolidated sector, households are net savers.  This net savings by households as a group show up Personal Saving in the National Income and Product Account published by the Bureau of Economic Analysis and with alternative definitions, in the Flow of Funds Accounts published by the Board of Governors of the Federal Reserve System.  There is no one ideal household savings rate for the economy.  High household savings enable a more rapid of capital accumulation by reducing the resources needed to support household consumption.  However, high savings can depress total demand for goods and services resulting in slowdowns increasingly reflected in deflationary pressures.



The following graph should open some eyes as to the overall health of the household sector’s balance sheet…








“Despite the volatile market of the past few years, the retirement planning business appears to have a bright future.  Current estimates show the market at $16 trillion, which compares to the $48 trillion total wealth of U.S. individuals.  Projections indicate that the retirement market is expected to grow to an astounding $39 trillion by 2012.”


“Household net worth rose from $43.58 trillion prior to the stock-market bust in 2000 to $44.41 trillion in the fourth quarter of 2003 due to robust home-price appreciation and the stock-market recovery, according to the Federal Reserve.

The central bank's research also reveals that mortgage debt slowed from a rate of 11.5 percent in the third quarter to 10.5 percent during the last three months of the year, while the jump in overall borrowing slipped from 9.9 percent to 8.3 percent. 

Bear Stearns economists note that homeowners tapped into $491 billion worth of equity in 2003.  Total equity, meanwhile, surged to $8.4 trillion as home prices continued their uphill climb.”

Source: The Wall Street Journal (03/05/04); Hagerty, James R.; Lagomarsino, Deborah








Similarly, we can look at the behavior of business in terms of the deficits it often incurs and the debt or liabilities it uses to finance its operations.  In Finance, the use of debt or liabilities is studied in several topical areas.  The use of debt or liabilities enables management to leverage up the return on the owners’ investment or what is called, Shareholders’ Equity if the business is organized as a corporation.  The relationship of debt to assets is called debt or financial leverage.  Traditionally, the owners’ investment has been termed net worth: the meaning is the same (we use the same terminology in both the households and business sectors).  If profits are $100 and the assets of the firm are $1,000, the return on assets is 10%.  If half of the assets are financed by debt or liabilities and the other half by the owners, the ratio of profits to net worth or shareholders for a corporation, is $100 to $500 or 20%.  In other words, management has leveraged profits as a return on net worth or owners’ equity with the use of debt or liabilities to twice what it would have been if the firm used no debt or liabilities.  This is standard practice in business.


Individual decisions as to the acquisition of assets and their financing in order to reward owners’ with a reasonable return on investment is called, Capital Budgeting.  As long as the cost of borrowing the funds in percentage terms is less than the expected rate of profits on the investment, it is a project that should benefit the owners.


A firm’s balance sheet shows on the one side its assets and on the other side its claims on those assets, in other words, who financed them.  The creditor's claims are called liabilities (debt) and the owners claim net worth or if it is a corporation, it will probably be called shareholders equity.  Just as many householders go to their graves with debt, so business will carry debt as long as they continue on.



The following graph shows that the business sector is doing well also…





…federal government (Deficits and National Debt)


The Federal Government runs deficits whenever it spends more than it taxes.  Deficits add to any outstanding debt.  Surpluses would reduce the National Debt.  It is just as reasonable for Government to borrow to finance assets such as highways, etc. as it would be for business or households provided they follow a rule of reason.  As just explained that rule of reason for a business is imbedded in Capital Budgeting.  Some form of capital budgeting should be used by government as well as households.  It does not insure that mistakes will not be made, but it does provide a rational approach to increasing net worth if estimates are soundly made.  A serious problem facing government and many households, is the lack of a discipline such as that embodied in capital budgeting.


In assessing the relative role of debt, several ratios can be used.  One available for use in governmental budget activity is the relationship (ratio) of debt to income.  In the case of Government, it would be called the National Debt to GDP (National Debt to National Income could also be used). 



1.                   Similarly, a firm’s (or household’s) debt as a ratio to profits (or income for a household) would also enable the assessment of a reasonable use of debt over time.

2.                   The Federal Government is currently undertaking a physical inventory of its assets.  This promises to be a challenging process that will certainly improve upon past estimates - the government owns ¼ of the entire land mass of the United States (not to mention the interstate highway system) 




Historical ratio of Federal Debt to GDP…






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