Overestimated Employment Growth Raises Concerns

The Bureau of Labor Statistics (BLS) has been overestimating employment growth over the past few years, drawing attention from notable figures such as former President Donald Trump and Federal Reserve Chair Jerome Powell. As large revisions to previous months' job data become more common, theories such as poor data collection methods have been proposed to explain this trend. One potential cause could be the decrease in response rates to surveys conducted by the federal statistics agency.

Declining Response Rates to Employment Surveys

The BLS conducts two comprehensive surveys every month to generate employment data. The first, the Current Population Survey (CPS), contacts about 60,000 households to determine the employment status of individuals aged 15 and older. The second, the Current Employment Statistics Survey (CES), involves interviews with 119,000 nonagricultural businesses and government agencies, representing about 619,000 individual worksites. These surveys provide crucial industry data such as employment, earnings, and hours for nonfarm payrolls, and have been essential for public policymakers, financial markets, and economists for decades. However, the BLS has noted a decline in the number of people responding to these surveys. For the CPS, the overall response rate dropped from 90.3% in January 2013 to 70.5% in August 2024. For the CES, the response rate fell from 63% in July 2014 to 43% in June 2024. Officials attribute this significant decrease to the onset of the COVID-19 pandemic.

Impact of High Nonresponse Rates

The federal agency closely monitors nonresponse rates as they directly impact data quality. High nonresponse rates increase the likelihood of bias in the final survey estimates. The BLS states that CPS estimates may be skewed if the characteristics and labor force statuses of nonresponding households differ from those of responding households. Several factors could contribute to the nonresponse, including privacy concerns, unavailable respondents, and difficulties contacting respondents. The BLS has noted that in recent years, it has become more challenging for Census interviewers to reach respondents, either in-person or by telephone.

Budgetary Constraints and Future Concerns

In June, BLS Commissioner Erika McEntarfer suggested that budgetary constraints might force the agency to reduce the CPS sample size by 5,000. She confirmed this reduction at the Council of Professional Associations on Federal Statistics (COPAFS) quarterly meeting in late June, stating that the change would take effect in 2025. David Wilcox, a senior fellow at the Peterson Institute for International Economics, expressed concern over the absence of a fully articulated strategy for replacing the CPS if the situation deteriorates further. He emphasized the importance of the CPS in gathering information about aspects of the labor market that are difficult or impossible to measure using 'big data' or alternative sources.

Revisions and Their Implications

Throughout this year, the BLS initially reported 1.84 million jobs. Following the first and second revisions, employment growth was adjusted lower by about 370,000 jobs. In August, the Department of Labor's annual benchmark revisions updated the payroll data, showing that the economy created 818,000—or 30 percent—fewer jobs from April 2023 to March 2024. Economists are debating whether these revisions have altered the perception of the economic landscape. While some believe that the downward revisions indicate a weaker labor market, others argue that fewer jobs do not necessarily imply a weaker labor market if high levels of employment are maintained.

Bottom Line

The decline in response rates to employment surveys and the subsequent overestimation of employment growth raise important questions about the accuracy of our understanding of economic trends. It underscores the need for reliable data collection methods and adequate funding for statistical agencies. What are your thoughts on this issue? Do you think the declining response rates and overestimated job growth are cause for concern? Share your thoughts with your friends and consider signing up for the Daily Briefing, available every day at 6pm.