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Economy in Brief

Analysis of the August Employment Report – An Econ 101 Quiz
by Paul L. Kasriel  September 7, 2021

The media talking heads commenting about the August 2021 nonfarm payroll report this past Friday were convinced that the delta-covid strain had struck. After all, the consensus estimate of the hundreds of thousands change in August nonfarm payrolls had a plus 7 in front of it, while the first guesstimate by the Bureau of Labor Statistics was a mere 235 thousand. Didn't economists know that the delta strain was raging in August when they submitted their forecasts? Well at least they got the sign right. There was an increase. An airplane-pilot friend of mine says that a good landing is one in which you can walk away from; a great landing is one in which you use the same aircraft for your next take off. When I was participating in this charade of forecasting weekly (!) and monthly economic headline statistics, I thought a good forecast was one when I got the sign of the change right. A great one was when my guesstimate was within one standard deviation on the correct side of the distribution.

But I am already digressing. What the talking heads focused on to validate their conclusuion that delta-covid was responsible for the “less-than-expected” increase in August payrolls was the 41.5 thousand decline in restaurant and bar employment. After all, why would an employer in this sector want to increase staff when fewer patrons were showing up to eat and drink? The talking heads were convinced that the decline in employment in this sector resulted from a drop in demand emanating from the delta spread.

But do we know for a fact that the delta strain curbed dining and drinking outside the home in August? We haven't seen the August retail sales report to corroborate this. Is a decline in the quantity purchased, in this case, a decline in restaurant and bar labor “purchased” necessarily indicative of a decline in demand?

To help us answer this, let's take a look at the chart below in which are plotted the month-to-month changes in food services and drinking places employment (the green bars, Irish?), the month-to-month percent changes in average hourly earnings for all private sector employees (the red line) and the month-to-month percent changes in average hourly earnings for leisure and hospitality employees (the blue line). Data for average hourly earnings for employees in the food services and drinking places sector, a subsector of leisure and hospitality, are available with a one-month lag. So, the August data are not yet available.

Notice that average hourly earnings in the leisure and hospitality sector increased by 1.35 percent in August, far outpacing the 0.56 percent increase for all private sector employees. Why would employers be increasing their hourly wages for leisure and hospitality workers if there were a fall in demand for workers because of a fall in demand of customers? Could it be that the supply of labor in the leisure and hospitality sector, in particular in the restaurant and bar subsector, contracted?

Why might the supply of labor in this sector have contracted? Perhaps because there are now more jobs available in higher-paying sectors. This would be consistent with bar and restaurant employers raising hourly wages. They would be trying to retain the workers they have and attract new ones. Maybe the delta strain was more prevalent in this sector and felled more workers. Maybe. But would this be a reason for the Fed to keep adding the same amount of reserves to the banking system each month? Would this Fed stimulus to aggregate demand produce more workers if delta covid strain were restricting the supply of them?

A good quiz question for an Econ 101 class would be as follows. We observe a decrease in the quantity of corn purchased and an increase in the price of corn. Did the demand curve for corn shift back or did the supply curve of corn shift back and there was a movement up along the demand curve? You have a fifty-fifty chance of getting the right answer. I would like to give this quiz to economic journalists and the economists they quote. Based on what I heard and read last Friday, I suspect most of them would get the wrong answer.

Viewpoint commentaries are the opinions of the author and do not reflect the views of Haver Analytics.
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