Tuesday, September 9, 2014

In which I politely disagree with Dean Baker about the employment report

 - by New Deal democrat

Last Friday Dean Baker wrote that Economists who understand economics didn't see the August Jobs Report as an Outlier, saying:
Actually, the numbers match the market very well. The economy grew at a 1.1 percent annual rate in the first half of the year. Faster growth in the second half of the year might bring the rate for the whole year to 2.0 percent. If we assume that productivity growth is 1.5 percent, this would imply an increase in the demand for labor of 0.5 percent. That translates into 700,000 jobs for the year or roughly 60,000 a month.
Let me state right here that, like Bill McBride a/k/a Calculated Risk, I think it most likely that August is simply an outlier.  As Jeff Miller pointed out on Sunday, the standard error in this series runs up to 100,000 a month, and as Bill pointed out, even in the best years for job growth, there has always been at least one faceplant.

You can probably see the issue here right off the bat:  If Dean is correct that August wasn't an outlier -- that if anything it was above trend at 142,000 -- then what about the last 7 months, in which 1.4 million jobs, or over 200,000 a month were added?  Were they all outliers?  In a row?  In fact, what about the last 3 1/2 years, as I'll show below.

To begin with, if we go back 65 years, all the way to 1948, when we can track both GDP and jobs, there have been 266 quarters in total.  When we compare real annualized job growth vs. real annualized GDP growth over those 266 quarters, the median difference is about 1.5%, meaning that in about half of those quarters, real GDP growth exceeded job growth by 1.5%, and in the other half real GDP growth was less than 1.5% higher than job growth.   Here's the graph - you'll just have to trust me on the count, unless you want to do it yourself!:

Here's a closer-in look at the last 30 years:

Two things to notice are (1) there is a lot of variability around that 1.5% median, and (2) since the beginning of 2011,   job growth has been well above trend in about 2/3 of the quarters, sometimes by over 2.5%.

Here's a slightly different way to look at the same thing.  This is the YoY% of real GDP growth (red) compared with the YoY% of job growth (blue):

You can see that job growth has typically been only about 0.5% to 1.0% less than real GDP growth for the last 3 1/2 years, in other words +0.5% to +1.0% higher than the long term trend that is Dean's benchmark.

So my question to Dean Baker is, respectfully, if August isn't the outlier, then what is your explanation for the job growth of ~8.2 million, or nearly 200,000 a month, for the last 3 1/2 years?

I do have a hypothesis, which I'll share in my next post.