Educational: ESR and Non-Farm Payrolls
- IntroductionAfter our post on Unemployment (link HERE) we are now ready to go through some of the most important indicators to follow the labor market in the USA. The first thing we want to follow is the ESR (Employment Situation Release, link HERE).The ESR comes out the last Friday of each month. And it includes two main indicators, unemployment rate and Non-farm Payrolls (NFP).
- Unemployment Rate
The unemployment rate is no more than the percentage of people that are willing to work and looking for a job but are unable to find one.If you’ve read my article of unemployment (here) you already know what you are looking for. The number is useful to know where we are but most important is the rate change. We want to know if the market is creating jobs for the people of it’s destroying them.Given that we already know how to analyze the unemployment data what is now very important is to understand our indicator. And there are 3 keys for this:
a) From unemployed to employed: The most obvious thing is that unemployment will increase in employment decreases and increase if unemployment decreases. If you basically move from employed to unemployed and vice-versa. To dig on this and understand what’s happening here we will check Non-Farm Payrolls (NFP).
b) What is the definition of “people willing to work”? If unemployed people suddenly stopped to “want to work” then they will not appear here and the unemployment rate will decrease. This is because in order to be unemployed you have to not only not have a job but also wanted to have one. If you are happily retired by the age of 40 you won’t count as unemployed, because you don’t want to work. So after checking unemployment its also important to see what has happened with “Labor Force Participation”. This will allow us to know how much we can trust the unemployment indicator.
c) Jobless Claims: Jobless Claims are published weekly. Jobless claims are the amount of people that are asking the government to get their “jobless pensions” while they get a new job. Which means that by following this indicator you can actually already know what’s going to happen to Unemployment and Non-farm payrolls by the time they come out.
- Non-Farm Payrolls
Non-Farm Payrolls are the actual number of payrolls that there are in the economy at a given period.As you can see in the long term the indicators don’t stop going up. This is for demographic reasons. If there is an increase in the populations there is going to be an increase in the payrolls, because now there are more people.What is interesting is to keep an eye on the change of the payrolls and its rate of change. This way we can know if the economy is creating jobs or is destroying jobs, and at what rate.
Finally, the Non-Farm Payrolls gives us information who is creating this jobs. This is if the jobs are been created by the government or by private companies. If its private companies, we can also know which sectors are creating this jobs. This is very important to get a better idea of which sectors are doing better and which are doing worse.
For example, services have been doing quite well in the last decade. Jobs lost during the crisis were created again quite fast, and the rate has been high since then.
The most important indicator to follow the labor market is the Unemployment rate. This indicator combined with NFP allows us to understand what’s the current state of the labor market and which sectors are been able to do better.But this indicator might not be enough. We might want to take into consideration Labor force participation. And if we want to keep a closer eye on what’s going on we might want to consider following the weekly updates on jobless claims.To fully understand the economic cycle you might want to study the evolution of salaries and productivity.We will dig into those in the future.
Nuño Pérez del Barrio