Establishment (NFP)/Household Ratio

Howard Simons lays out the ugly details:  We are on the verge of ending more than a half century of job growth:

"The unmistakable trend of the past six decades has been that of a secular increase in the percentage of the workforce working in establishments; this is in spite of a celebrated American tradition of entrepreneurship and labor force flexibility — read "ability to fire people" — unmatched among the industrial economies. We are now perilously close to breaking this long uptrend."

Here’s the chart he created showing the ratio between the household and establishment surveys: 


Ignore the post WWII spike, when enormous numbers of servicemen returned to the workforce. Since 1950, that ratio has stayed within the broad uptrend.

Simons notes the significance of this:

"If we display the establishment survey’s total as a percentage of the generally larger household survey, a pattern emerges. Periods of strong labor demand, such as during the Korean War in the early 1950s, the Vietnam War in the late 1960s and the late 1990s technology bubble, see an increase in the ratio of establishment to household labor totals. The percentage falls once labor demand falls.

This suggests that incremental labor demand comes not from sources such as self-employment and entrepreneurial activity, both of which are represented in the household survey, but rather from business establishments. When hiring gets large, the large get hiring: Business establishments can raise wage levels and bid people away from self-employment and the like."

What’s particularly interesting to me as an ongoing critic of the eoonomists (and their models) who keep getting the monthly NFP data wrong, I agree with Simons observation here:

"But as the cluster of recent forecast errors highlighted in the oval indicates, the recent performance of economists has deteriorated. Since the December 2002 report, those who "bet the under" would have won 19 out of 32 times, or 59.4%. The average error relative to the size of the labor force over this period was a far more sizeable -.023%. As some officials might note, there’s a "divergification" we need to explain."

Here’s that cluster chart:


Interesting stuff. Thanks, Howard.

Don’t Let Jobs Noise Distract You
Howard Simons, 10/4/2005 8:00 AM EDT

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