Intrigued, I looked closer. To their credit, the BLS publishes their entire methodology online. All you have to do is wade through explanations of statistical number crunching as described by Washington bureaucrats. What I found suggests that Crudele may have been understating the problem. When you actually reproduce the BLS methodology described in the BLS Handbook of Methods (Chapter 2), you arrive at the conclusion that fully 85% of the new jobs claimed to have been created since March 2003 are imaginary.
To arrive at a monthly estimate of nonfarm payrolls, the BLS creates a benchmark universe of jobs through compiling Unemployment Insurance records from all 50 states and the District of Columbia. This benchmark is updated each year, about eleven months after the fact. The latest benchmark data is March 2003, which was compiled in February 2004. Then, each month the BLS takes a random sample of the universe and counts the jobs found within. They then compare that figure with the corresponding figure from the prior month's sample. So if the latest month's sample found 26,000 jobs, and last month's found 25,000, then the conclusion is made that the job market grew 4%. They then multiply that percentage growth against last month's estimate of total jobs. But that's not where it stops. They then arbitrarily add a figure for jobs created by new businesses they imagine were created, based on the number of businesses went dead that month (which are signified by the number of businesses in the sample that either reported 0 employees or didn't report at all.) The assumption here is that a dead business in the sample automatically means another business was created that month that hadn't gotten around to report to the state unemployment insurance agencies. Of course this doesn't account for all those businesses who laid off their employees because their jobs were outsourced to India, but I'm sure that's not a problem. Right.
The insidious thing about this is that these imaginary numbers appear to be cumulative. That is, if BLS imagined that 1,000 jobs were created in one month by businesses they can't see, then that 1,000 gets added to next month's total as well. Here's the formula:
(Last month's Total Jobs X Growth Rate of Sample) + New Jobs Imagined By BLS = This Month's Total Jobs
So this month's imaginary figure gets rolled into next month's figure, and next month's etc.
Applying this method to the actual nonfarm payroll data, we find that 1,104,000 of the 1,303,000 new jobs reported by the Department of Labor since March 2003 are basically made up out of thin air. Here's how it translates graphically:
When this birth/death model was created in 1998, it was expected that it would change the results to a modest "small and stable" degree. Indeed for the 11 months from March 2003 through January 2004, a modest 37,000 average jobs per month were added by this technique. Something happened though after that. Over the last four months (February through May 2004) this modeling technique padded the total job growth by over 730,000 jobs, about 183,000 per month.
In February 2005, there will be a new benchmark calculated from universal UI data that will reconcile these figures to the real world at least through March 2004. Most likely, what will be found is that job growth came in somewhere in between the 1.3 million announced and the 199,000 jobs actually detected. This is because there should be SOME new business creations adding jobs. However, how many of those businesses reported zero jobs to BLS did so because they outsourced to India instead of creating a vacuum where a new company grew domestically? When given other well known measures of employment showing no movement at all through this period, we are likely to be surprised how bad things really have been all the while our leaders were telling us how lucky we are.
(Thanks to comments shown in the comments page for this post, the numbers are slightly revised. See comments for full discussion.)