Barron's Online -- December 8, 1997
Day Labor
A surprising factor in hourly earnings
By GENE EPSTEIN
Sudden Impact
Call it the Perfect Report, especially since its apparent
imperfection is just a mirage. Friday, the Bureau of Labor
Statistics released its data on November's employment
picture, confounding Wall Street's expectations and
gladdening the hearts of those of us in the bleeding-heart
capitalist camp. In the words of phrase-maker Ed
Yardeni, the report revealed a hiring panic nationwide.
According to the BLS, the number of nonfarm jobs grew
by a whopping 404,000 in November, twice the
consensus estimate of 200,000. At the same time, the
unemployment rate ticked down to 4.6% from October's
4.7% rate, putting it at the lowest level since October '73.
And even the reported surge in average hourly earnings
of an annualized 7.2%, a supposed harbinger of
wage-push inflation that helped roil bond prices, turns out
to be the one figure that just ain't so. If not for distortions
in the way the BLS calculates the data, the real increase
would be roughly half that, or about 3.6%.
My authority on this is Brian Garvey, a 28-year-old
graduate student at Boston University. Garvey has
completed a study showing a strong bias in the monthly
estimates of average annual earnings that correlates with
a certain quirk in the calendar. A call to BLS division chief
Patricia Goetz turned up the interesting news that the
agency acknowledges the problem and is in the "early
stages" of looking into it. But until this work is completed
(and may that day come soon), it's important to
understand just how this closely-watched indicator is
being buffeted by the number of weekdays there happen
to be in any survey month. In fact, listen closely and you'll
see how I'm able to predict that next month's estimate for
average hourly earnings should show a zero increase or
even a decline, simply because December will have 23
weekdays and November had 20.
Uncanny? For sure, but as any schoolboy knows, there
can be 20 to 23 weekdays in a month, leading to
differences in days between one month and the month
before of -3, -2, -1, 0, 1, 2, and 3 days. For instance,
since November had 20 weekdays and October had 23,
November was a "-3" month. And since, as noted,
December is a 23-weekday month, it gets a 3 label.
Now look at the top chart on this page, which shows a
striking picture: The change in average hourly earnings
as reported by the BLS has been closely correlated with
this weekday differential. In fact, based on 87
observations from January 1990 to April '97, Garvey
found that the average annual increase in months labeled
-3 has run about 6%, while in 3 months it's averaged
about zero. And notice that a similar yawning gap exists
between -2 and 2 months.
Now, unless we're to believe that this New Age economy
has brought a peculiar numerological method to the way
the nation's bosses bestow raises, something else must
be going on. BLS chief Goetz believes it's happening in
her own backyard, but she's not quite sure what it is. In
her opinion, it probably has something to do with the fact
that a number of the reporting firms pay their workers
salaries on a semi-monthly or even monthly basis. The
workers involved are professionals, like journalists and
economists. The agency must then convert those data
into an hourly rate, and it's apparently forced to use the
calendar in order to do this.
As noted, I wish the BLS luck in working through this
particular morass. Meanwhile, the second chart on this
page, which shows exactly how the next 13 months fall,
should prove a useful guide to the monthly ups and
downs of average hourly earnings. Since December '97 is
a +3 month, look for a near-zero change.
But let's return to the good news the agency can be
trusted with. November's employment gains in the private
sector were widespread, with especially large increases
in manufacturing, services and retail trade. Manufacturing
added 44,000 jobs, marking the third month out of the last
four in which this sector has had a large increase. More
than 200,000 manufacturing jobs have been added since
the industry's last employment trough in September '96.
Pacing the strength in manufacturing, wholesale trade
added 24,000 jobs, mostly in durable goods. Despite
November's unusually cold weather, construction
employment rose by 29,000. And to cap it all off the good
news, government employment was unchanged.
At this point, good news for jobs is usually interpreted to
mean bad news for inflation, but on that score more sober
thinking should prevail. To begin with, it's worth noting
that Fed Chairman Greenspan's favorite indicator of labor
militancy, the "quit rate," fell in November, from 11.2% of
the unemployed to 10.4%. For the uninitiated, this
involves the take-this-job-and-shove-it types who were
confident enough to abandon their situations without
having another one lined up-what the BLS calls "job
leavers." When the chairman originally sounded the alarm
about the rising quit rate, it stood at 11.3%. So despite
the tight labor market, workers are maintaining that
humility to which the 'Nineties have been accustoming
them.
Moreover, the Asian contagion will not only continue to
bring increased disinflation to our shores when it comes
to prices, but when it comes to wages as well. That's
because currency devaluations make the Asian worker
cheaper in relation to his American counterpart. And as
noted above, the recent increase in average hourly
earnings is somewhat exaggerated and will likely show a
downside correction come next month.
But even so, the laws of supply and demand have not
been repealed. With labor scarcities fairly widespread,
wages have been rising and will continue to do so as
long as the unemployment rate remains as low as it is.
But whether this will lead to a ratcheting up of inflation is
another matter. A recent study from the New York Fed
has shown that in the goods sector of the economy,
increases in the rate of compensation growth simply
doesn't lead to higher prices, and that in the service
sector, the relationship is fairly weak. That's because
goods-producing firms no longer have pricing power,
bedeviled as they are by global competition, and many
service-producing firms always did have to exist in a high
competitive environment. So as much as they may want
to hike prices in the face of rising wages, they simply
can't.
This lack of pricing power means that, in order to absorb
higher wages, companies will either find new ways to
boost productivity or will simply have to eat it in terms of
lower profits. But as Wall Street knows even better than
Main Street, earnings are more than healthy, and if some
erosion starts to set in, the companies affected won't be
declaring bankruptcy anytime soon.
Greenspan should keep his eyes on the ball. The Great
American Job Machine is vital for addressing the main
priorities of our time: to reduce crime, to push people off
the welfare rolls and onto the employment rolls, and to
help narrow the widening gap between rich and poor.
Seeing it do its thing is cause for cheers.
Postscript: Wrightson & Associates chief economist, Lou
Crandall, inspired by Brian Garvey's finding about the
calendar-quirk-driven average hourly earnings, has found
another such quirk. For some reason, changes in the
average workweek as reported by the BLS are correlated
with the number of days in the survey month. In months
with a relatively greater number of weekdays, the
workweek is biased upward. Since that's true of
December, look for an upward bias in the next report.
But just to confirm that the gods had not gone completely
crazy, Crandall did another kind of test and has
reassuring news: The number of weekdays in a month
shows no correlation at all with the change in nonfarm
payrolls.
E-Mail: gene.epsteinnews.barrons.com
Copyright © 1997 Dow Jones & Company, Inc. All Rights Reserved.
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