General Electric’s ex-CEO Jack Welch can’t believe that the U.S. unemployment rate actually fell to 7.8 percent in September. He thinks the Bureau of Labor Statistics is manipulating the data. It is understandable that he should think that way. GE was fined by the Securities and Exchange Commission for manipulating its earnings data during Welch’s watch.
When I reported on business for the Rochester Democrat and Chronicle some 20 and 30 years ago, I had dealings with statisticians and analysts for the New York Labor Department and the U.S. Bureau of Labor Statistics. They were thorough professionals. They were like scientists and engineers. They didn’t care what I wrote so long as I understood the figures and wrote about them correctly.
The monthly jobs figures are come from two sources, a household survey and an employer survey. The household survey is based on asking a cross-section of the population whether they are employed and, if not, whether they have looked for work during the previous month. These two figures are used to generate the monthly unemployment rate.
The employer survey is based on interviewing a cross-section of employers as to whether they have hired or laid off employees during the previous month. Based on these results, the BLS adds to or subtracts from a benchmark figure of the number of jobs.
The benchmark figure is based on an actual count of the number of people paying workers’ compensation taxes. It is the most accurate and meaningful figure, but it is always at least six months out of date because it takes time to add up all these figures.
The unemployment rate number probably is an undercount. It does not include “discouraged workers” who’ve stopped looking for jobs, or part-time workers who’d like to work full-time. The jobs number also is often an undercount. It does not include the number of jobs created by formation of new businesses. The BLS only catches up with those jobs when it does a new benchmark, which is what happened in September.
Both figures over time are accurate indicators of the trend. If you always conduct a survey in the same way, then, even if it is flawed, it will always be flawed in the same way. It’s not unlikely that the unemployment rate is exactly 7.8 percent, but it is certain that it is lower than it was at the beginning of the year when it was reported at 9 percent.
Reports of earnings by corporations such as General Electric, in contrast, allow a lot of discretion in how things are reported. By timing transactions on which a company takes a profit or a loss, the earnings can be made to appear much more stable than they otherwise would be. This is not uncommon and, in and of itself, it is not necessarily dishonest. It has to do with the timing of what is reported, not the content. A company that is really unprofitable could not smooth its earnings that way. But in Welch’s case, GE did overstep the bounds and had to pay a fine to the SEC.
As to the significance of the figures, it is still true that the current economic recovery is weaker than any U.S. recovery since the Great Depression. I don’t think this is President Obama’s fault. It is the result of decades of a hollowing out of the U.S. economy and the substitution of debt for income. I think the Obama stimulus did as much as can reasonably be expected, and the Republican leadership was and is opposed to the President doing anything more. My criticism of Barack Obama is on other grounds—that he is anti-labor, pro-Wall Street and indifferent to the plight of foreclosure victims, and that he opposes the necessary steps to prevent another financial bubble and crash.
Here are links to the Bureau of Labor Statistics reports, with explanations of how the figures are compiled.
Here are links to explanations and comments on the unemployment and jobs figures.
Truth About Jobs by Paul Krugman in the New York Times.
September jobs report: Where do these numbers come from? by Dylan Mathews in the Washington Post
Small businesses are likely adding more employees than the government reports by Matthew Yglesias for Slate
Forget Everything You Thought You Knew About the Summer Jobs Numbers by Brian Beutler for Talking Points Memo
The Unemployment Surprise by John Mauldin on Business Insider.
Chart of the Day: Net New Jobs in September by Kevin Drum for Mother Jones
Here are links to comments and background information on how Jack Welch reported General Electric earnings.
Ethical standards in different data communities by statistics expert Andrew Gelman
GE’s Jack Welch Knows About Cooking the Books by Barry Ritholtz on The Big Picture
GE Settles Accounting Fraud Charges from CFO.com
The chart below shows fluctuations in General Electric’s reported earnings under Jack Welch and his successor.
[Update 10/15/12] Click on BLS Numbers: The Case For and Against Paranoia for more analysis of the jobs numbers on the Political Math web log. The writer makes the point that the annual revision of the jobs numbers takes into account the population increase during the year.