Wednesday, June 20, 2012

Separating Fact from Fiction in Rhode Island's Labor Market Data

This is an article I wrote several weeks ago that the ProJo chose not to publish in its printed edition.

I've always admired weather forecasters. Whenever they want to know precisely what the current conditions are, all they have to do is look out the window. Things aren't quite that simple for economists. A great deal of the data we use is survey based. And, predictably, survey data are often revised, occasionally in ways that tell a very different story than what the originally released data showed.

This is the case Rhode Island right now. After my March Current Conditions Index report release, which showed that based on the existing data Rhode Island was flirting with the double-dip recession, I was informed by the Rhode Island Department of Labor and Training (DLT) that the likely upcoming revisions to their data will tell a strikingly different story. Instead of seven or eight months of consecutively declining employment, the upcoming data revisions apparently show that employment actually rose throughout that time period. What they did not say, but that is every bit as important, is that if employment has actually been rising, a number of other key indicators will also be affected, not the least of which is our state's unemployment rate.

Some of this was apparently discussed at the recent Revenue Estimating Conference and reported by the local media. However, with the release of the April labor market data, we only heard about the existing labor market data, which we now know is faulty. Whenever anyone turned on their television or read the local newspapers, they were told that Rhode Island's unemployment rate rose to 11.2 percent as employment fell yet again.

What an extraordinary time! I honestly can't remember ever being informed this close to the most recent rebenchmarking (data revisions) that such dramatic changes were coming. This placed the local media in quite a predicament, as they chose to report the April data as released by the DLT even though, as I pointed out to a number of them, we shouldn't put very much confidence in that data or the obvious conclusions that emerge from analyzing it.

So, at this point it is appropriate to quote the character Emily Litella of Saturday Night Live fame concerning Rhode Island’s large number of employment declines and the increase in our unemployment rate above 11 percent: Never Mind!

The origin of the situation we now find ourselves in is the result of cost cutting at the US Bureau of Labor Statistics (BLS). Soon, it will be taking over the task of producing the monthly employment numbers that was historically done by our DLT (this is also true for all other states). While this may well lower costs, its greatest cost to the people of Rhode Island will be the loss of all the experience and expertise of our DLT possesses. Furthermore, the way the BLS will produce their estimated labor market values will not incorporate as much known data as the DLT has in the past. Instead of beginning projections after the third quarter of the prior year, the BLS will start after the second quarter. Furthermore, and more troubling, Rhode Island will apparently be homogenized. By this I mean that exceptional circumstances or events that would routinely be analyzed and meaningfully incorporated into the labor market data by our DLT will now often be ignored by the BLS. As Rhode Island has an extremely idiosyncratic economy, this homogenization will make our state’s labor market performance appear to be very different from what it actually is at times. Ironically, the most obvious impact of this homogenization will be to make Rhode Island appear to more closely resemble overall US economy. If you don’t believe that, take one look at what the BLS has done with their estimation of our state’s manufacturing wage (especially look at the charts after Read More ...)!

Because of these extraordinary circumstances, I found it necessary to build a small econometric model of Rhode Island’s labor market in order to estimate and simulate various labor market indicators. According to my model, payroll employment has not been consecutively declining, as the existing data show, but is in a mild uptrend. At the Revenue Estimating Conference, the DLT offered tentative projections of where they believed payroll employment might be as of March. My model produces slightly more optimistic numbers. As of April, my estimate of payroll employment is slightly above 462,000, which is higher than the official April value of around 458,000. Instead of having eight consecutive employment declines in the last nine months, as indicated by the current DLT data, my model shows consecutive increases for seven of the past eight months, although not necessarily by large amounts. Along with this, my estimate of the April unemployment rate shows it declining to 10.7 percent, not rising to 11.2 percent. Even though my estimated jobless rate may appear to be “better” than the DLT’s official value, its foundations are less than flattering -- it is accompanied by declines in both our labor force and resident employment.

The current divergences in labor market data are not the fault of our state’s DLT, but the result of something forced upon them by the federal government -- a different methodology. While I continue to have the utmost faith in our state’s DLT, I am very irritated by the apparent attempt to politicize our state’s jobless numbers by the DLT’s spokesperson, Laura Hart. She recently offered an utterly ridiculous explanation as to why our state’s jobless rate is so high -- Rhode Island doesn’t have the economies of scale that states like Massachusetts have. If her hypothesis were correct, Delaware, another small state, would have a very high jobless rate, while California, an extremely large state, would have a very low jobless rate. For April, Delaware had a 6.8 percent jobless rate while that for California was 10.9 percent.

It’s bad enough that the diverging data exists. Having DLT’s spokesperson offer such ad hoc rationalizations only makes things worse.

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