Quantity Versus Quality:

Assessing the True Meaning of Monthly BLS Jobs Reports

Abstract

The Dent Research Employment Index analyzes the quality of jobs added to the economy each month. The official monthly jobs report, released by the Bureau of Labor Statistics (BLS), provides only a quantitative tally of the labor market's performance. Our research pairs a wage component to the net number of jobs added across the economy. We establish a median wage level, then classify the jobs created above and below that threshold into 12 distinct wage categories. The Dent Research Employment Index provides much-needed context for interpreting the monthly BLS jobs report.

Introduction

The U.S. economy is in a long period of stagnation, marked by slow employment growth. Unfortunately, some of the historical measures used to gauge the health of the labor market are no longer reliable.

Regardless, many investors, policy makers and economists still view the monthly BLS reports, which detail the net number of new jobs created in the economy and the current level of unemployment, as important insights into the economic health of the nation. In fact, the unemployment rate is perhaps the single most important statistic considered by the Federal Reserve when it determines monetary policy.

However, the way new jobs and unemployment are calculated by the BLS can be misleading. As a result, economic stagnation has persisted even when the jobs report has been favorable for many months, with a steady amount of positions being created coupled with an unemployment rate that continues to fall. The reason the economy remains weak, despite modest employment improvement, is because many of the new jobs pay significantly less than the jobs that were lost during the financial crisis.

In prior economic times, a simple tally of new jobs created would provide enough information to estimate the general trend and strength of the economy. But today is unlike any other time in modern economic history. This is evident when the details of jobs lost and gained are reviewed.

According to the National Employment Law Project, the employment landscape has changed significantly since the financial crisis. Today, lower-wage industries employ 1.85 million more workers than at the start of the recession. By contrast, there are 958,000 fewer jobs in mid-wage industries and 976,000 fewer positions in higher-wage industries compared with prerecession levels. So although we have recouped most of the job-loss that occurred, there has been a troubling shift toward the lower-paying end of the income scale.

This illustrates the main problem with the BLS numbers: They focus only on the quantity of jobs created and give no thought to the quality of those positions - a crucial distinction.

Higher-quality jobs pay well, and the income they provide boosts consumer spending - particularly discretionary spending - in a way that lower-paying jobs cannot. Given that consumer spending is a key driver of the economy, these are the types of jobs that we desperately need.

Mindful of the importance of these two aspects of the jobs report, Dent Research provides a snapshot of quantity as well as quality. Our analysis is typically published on the first Friday of the month.

Methodology

Each month, the BLS publishes two key employment reports: a wage report that details the salaries added across nearly 700 private industries[1], and a payroll report that highlights the number of jobs added across 150 industries.[2] To assess the quality of jobs added during a given month, Dent Research compares the two reports, sorting each month's new jobs into 12 different buckets based on wage level.

These wage buckets are then analyzed based on whether they exist above or below the median wage line. This provides a detailed illustration of where jobs are being added along the income scale each month. When more jobs are added above the monthly median wage level, it is a positive sign. Conversely, it is a negative sign when more jobs are added below the median level.

Once the numbers are tallied and our analysis is complete, we publish our findings as the Dent Research Employment Index. Our release includes a brief report on the significance of the monthly numbers and a short explanation of our methods.

To provide additional perspective, we also include a graph that illustrates the quality and quantity of the monthly jobs number. In order to compare the month-to-month change, data is shown for the current and previous month, including each of the 12 wage buckets and the median wage line.

The sample graph below comes from our April 2014 release. In that month, the U.S. economy added 273,000 private sector jobs, beating expectations. Despite the monthly gains, more than half of the jobs created were below the median wage line. Even worse, the bottom three wage buckets, which account for 38% of all jobs in the economy, made up over 40% of the month's job additions.

While many analysts declared the April jobs report a sign of economic strength, our research clearly showed that the low quality side of the income scale grew larger. Therefore, the new jobs that were added actually represented a continued drag on the economy.

Note: In the absence of fully detailed annual data, wage buckets can be subject to some distortion. We do not assert that the actual distribution of jobs and wages added each month exactly matches our index. It does, however, provide a sound baseline from which we can measure monthly change.

Conclusion

The Dent Research Employment Index provides the proper context in which to understand the monthly BLS Employment Situation release. We match a wage component to the full tally of jobs added to the economy each month. This allows us to assess the quality of the jobs that are being added.

By doing this, we provide a richer analysis of the employment picture than what can be gleaned from simply reviewing the total number of jobs created each month. That in-depth analysis can also be extended over time to show important trends in quality.

In this fashion, we can answer important questions like...



[1] Bureau of Labor Statistics, Establishment Data, Table B-3a

[2] Bureau of Labor Statistics, Establishment Data, Table B-1