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US employment tutorial 4: Nonfarm payrolls [ClearOnMoney]
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US employment tutorial 4: Nonfarm payrolls

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Commentary

US employment tutorial 4: Nonfarm payrolls

19 Nov 2009 by Jim Fickett.

The total number of jobs being worked is obviously a key indicator of the economic state of the nation. Nonfarm payrolls (NFP) count the vast majority of jobs and, many details and caveats aside, give a clear read on the trend in jobs. Note that the month-to-month changes are quite noisy and one should really look at larger trends.

According to the Bureau of Labor Statistics, who compile the data, ”[NFP] exclude proprietors, the unincorporated self-employed, unpaid volunteer or family workers, farmworkers, and domestic workers. Salaried officers of corporations are included. Government employment covers only civilian employees; military personnel are excluded.” These choices are not explained, but make sense. The excluded classes are either hard to count or highly dependent on non-economic factors, e.g. wars for the military and the weather for farms.

The NFP are generated by surveying employers. Thus it is jobs that are counted, not individuals – a person holding two jobs may be counted twice.

Since the news is so often focused on attempting to deduce great meaning from tiny changes, it is the month-to-month (MTM) changes in NFP that are usually in the headlines. However the MTM changes are very often significantly revised. Here is a typical period (numbers are thousands of jobs):

Month Initial report of MTM change First revision Second revision
2007-Jun 132 126 69
2007-Jul 92 68 93
2007-Aug -4 89 93
2007-Sep 110 96 44
2007-Oct 166 170 159

This time period was chosen because in mid-2007 there was considerable controversy about whether the nation was about to enter recession, and every month the release of the NFP generated intense arguments. Yet, as the table makes clear, the first number out was often quite significantly revised a month or two later. For Aug 2007 the MTM change was even revised from negative to positive. Note also that even the final revisions (the rightmost column of the above table) jump around a great deal.

The lesson is that it is quite dangerous to read much into one MTM change. Instead, one should look either at the longer-term trend in the MTM figures, or at change over a longer period. On the main US non-farm payrolls reference page, we use the year-over-year change, as shown at left, which shows the trend very clearly.


This graph, of the MTM changes over the last five years (courtesy of the Federal Reserve Bank of St. Louis) shows that, despite the noise, the situation over a period of perhaps 6 months is quite clear.


Note that the neutral level is not a MTM change of 0. Since the US population is growing about 1% a year, some jobs should be added each month to keep up with population growth. This works out to something in the neighborhood of 100,000 jobs per month, just to stay even.

The methodology used for calculating the NFP leads to some controversy. The numbers are actually derived from two different surveys. One, the Quarterly Census of Employment and Wages (QCEW) is very thorough but slow – there is a seven month delay in getting the report. Only once each year are the NFP re-anchored to the actual, and very reliable, counts of the QCEW.

The other survey, called Current Employment Statistics (CES), is done every month. Each month a sample of establishments covering about one third of all jobs are surveyed and all establishments that reported in this month as well as the previous month are taken into account. If the number of jobs in those establishments was, say, down 1.5%, then it is assumed that, to a first approximation, NFP overall were also down 1.5%. There is also a small correction made, from the so-called “birth-death model”, based on the historical difference between actual counts and the first approximation.

Clearly, one can argue with the assumption that the full set of NFP jobs behaves as do the jobs in a sample of continuously-existing establishments. This was clearly wrong over the last two years in the case of mortgage lenders and homebuilders, for example. However the above procedure works pretty well – each year when the NFP are re-anchored to the actual counts, the correction is, on average, only 0.2%.

All in all, as long as one looks at the larger trend, the nonfarm payroll counts are an excellent proxy for total employment in the country.

(For sources and further detail see the reference page US non-farm payrolls background.)