The labor market is increasingly looking like the imposing face of the Wizard of Oz, with disappointment behind the scenes. One only has to look at the latest labor market figures.
Recent data show that the economy added only half as many new jobs at the end of last year as previously estimated. It’s no wonder that many Americans are unfavorable about the economy.
Each month, the Bureau of Labor Statistics produces an estimate of the number of people employed at businesses across the country, excluding farms. This figure is frequently mentioned in the news each month and is based on a survey of about 119,000 businesses and government agencies in 670,000 locations.
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In the last quarter of 2023, those monthly employment reports showed nonfarm payrolls rising by 637,000—undoubtedly strong growth. But a much larger survey of businesses suggests that was a vast overestimate.
The BLS also releases a Business Employment Dynamics (BED) report each quarter, which is based on a much larger survey of 9.1 million private businesses. That’s more than ten times the size of the survey used in the monthly employment reports. So the BED has the law of large numbers on its side when it comes to accuracy.
This much more comprehensive survey found that only 344,000 new jobs were created in the last quarter of 2023, about half the number estimated in the monthly labor market reports. So, contrary to the glowing positive headlines in the economic news every month, the labor market is not that strong after all.
To be fair, the nonfarm payroll and private sector employment numbers from the two different BLS publications do not measure the same thing. Certain industries (government, railroads, agriculture, etc.) are included in one survey but not the other.
Still, these two numbers are very close over time, and the much larger dataset of the BED report will later be used to revise the monthly employment numbers and make them more accurate. These revisions will likely need to be significant, as the discrepancy between the two reports has become a pattern recently, meaning the divergence in the last quarter of 2023 is not a mere statistical coincidence.
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In the second quarter of last year, BED data indicated that the monthly reports had overestimated employment growth by about 489,000 jobs. In the third quarter, things were even worse: The monthly labor market reports showed a cumulative gain of 640,000 nonfarm jobs, but the BED data showed a loss of 192,000 private sector jobs. That’s a shockingly large difference of 832,000 jobs.
In short, the economy is not creating nearly as many new jobs as previously thought. Yet few people bother to look behind the scenes and find out these important details. Instead, the first estimates of rapid job growth get a lot of media attention each month, but then there is silence when more comprehensive – but less impressive – numbers follow.
But these new numbers help explain the discrepancy between supposedly strong job creation and poor business surveys. Economists are puzzled as to how to square the circle of these conflicting indicators. The simple answer is that the labor market is rather weak and people are being honest about their feelings about the economy.
Dorothy discovers that the wizard is just a facade.
