Know Your Numbers: Employment, Part 2

As the first part of this article discussed, the Labor Department's monthly release of employment data provides a huge amount of detailed information about the labor market and its participants. In particular, the employment report incorporates two methods of data collection, which often produce widely varying numbers. This second part turns to some of the studies of the household and establishment surveys and looks for explanations for the disparities between their resulting data.

Household or establishment: Which is better?
The debate between whether the household survey or the establishment survey produces better results has been going on for some time. Because the two headline numbers, non-farm payrolls and the overall unemployment rate, are derived from different surveys, new releases provide added ammunition to the debate. The non-farm payroll number comes from the establishment survey. However, the unemployment rate is derived from employment and total labor-force numbers provided in the household survey. The fact that these two numbers come from different sources explains why the unemployment rate sometimes seems out of step with the reported non-farm payroll number; this month, for instance, most commentators are pointing to weak job growth, yet the unemployment rate actually fell by 0.1% to 4.6%.

Several academic studies have looked at the disparity without reaching consensus on which measure is preferable as a gauge of employment activity. While some argue that the household survey does a better job of including non-institutional employees like the self-employed, others respond that institutional employment is of higher quality and provides better salaries and benefits. Obviously, these assertions are debatable, so it makes sense to look at both sets of data and to draw your own conclusions from all of the information.

Both the household and establishment surveys have some common limitations. Because the focus of both surveys is simply whether someone is employed, qualitative conclusions about whether the jobs people have are well-suited to their talents are difficult to reach. Ideally, one could use the data to confirm or reject anecdotal evidence of widespread underemployment among the workforce. Although some of the data on part-time workers looks at the reasons why particular workers end up working part-time, similar information on job satisfaction among full-time workers is unavailable.

Economic implications
A strong labor force is an integral part of the internal operation of a successful economy. People who are employed earn money to support themselves, which they then use to purchase products that they need or want. Demand for these products enables businesses to be profitable and gives their employees a job to do, which in turn can lead to job growth and further increases in economic demand. On the other hand, high unemployment reduces demand, especially for luxury products; this reduction of demand can then lead to layoffs among the businesses that make those products, and that in turn can cause more difficulties for the economy as a whole. Employment represents an economic feedback mechanism that can be positive or negative, depending on current conditions.

Some of the details of the employment report are also important to the overall economy. The average number of hours employees work serves as an indicator for general economic activity; most companies tend to respond to changing labor conditions by adjusting the hours of current employees and delaying its hiring or firing decisions until better-established trends have become evident. As a result, hours worked tend to increase in advance of hiring new employees and tend to decrease before announcements of job cuts or layoffs.

Information on average hourly wages serves not only to measure improvement in the standard of living for employees but also to indicate the costs that businesses face in maintaining their workforce. Although increasing wages may seem like a good thing for everyone, policymaking bodies like the Federal Reserve view wage increases as a warning sign of potential price inflation, since businesses facing higher labor costs may have to pass them on in the form of higher prices. Weakness in the jobs data may lead some to believe that the Fed will stop raising interest rates, but given the Fed's traditional emphasis on fighting inflation as its primary mission, strong wage growth may keep the Fed on the defensive.

For investors, the breakdowns of employment among industries can be extremely helpful in making investment decisions. Strength in financial and professional services, for instance, serves as one indication that companies that provide those services, such as JPMorgan Chase (NYSE: JPM  ) and Accenture (NYSE: ACN  ) , will perform well. Weakness in manufacturing, on the other hand, may bode ill for manufacturers like Alcoa (NYSE: AA  ) that depend on steady demand.

Keep in mind, however, that employment levels provide only one piece of the equation in evaluating a business; for some companies, decreasing employment can actually be a good thing if a reduction in the workforce leads to improvements in productivity and reduced labor costs. Often, investors respond favorably to announcements of job cuts at large companies in expectation of reduced expenses and improved profits.

In summary .
The Labor Department's employment report is extremely valuable as a source of useful information. Its early release date makes it one of the first major indicators of economic activity for a given month, and consumers and businesses alike feel its effects. The level of detail included in the report makes it useful to economic policymakers, corporate managers, investors, and the general public. Even though the various methods of collecting data sometimes produce conflicting results and make it difficult to draw strong conclusions, you can still pull a great deal of useful information from the report by understanding the implications of the different data presented and using your own knowledge to pick out what's important to you.

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Accenture is a Motley Fool Inside Value recommendation, and JPMorgan Chase is a Motley Fool Income Investor pick.

Even though the establishment survey doesn't count Fool contributor Dan Caplinger among the employed, he doesn't mind. He doesn't own shares of any of the companies mentioned in this article. The Fool's disclosure policy never stops working for you.

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