November Job Numbers: What Are We Missing?

The White House got a big boost on Friday from the Bureau of Labor Statistics, which released moderately positive jobs data for November and revised its October and September numbers higher, pushing the official unemployment rate down to 8.6% from 9%, the lowest level in two years.

The new number resurrects the possibility of unemployment dropping below 8% by election day, the threshold below which Obama’s chances for a second term improve dramatically, if conventional political wisdom is correct. Even the impression of improvement may be enough to boost Obama’s reelection chances, and the spike in consumer confidence earlier this week suggests the trend may be heading that way.

But beneath the cries of joy at the White House, there are undoubtedly some concerns, as the new numbers present some mysteries, and the possibility of catastrophe remains real, thanks to the continuing crisis in Europe.

First, much of November’s improvement in unemployment came from the fact that the pool of people looking for work dropped sharply as 315,000 Americans left the labor force. Second, the revisions of past months suggest that BLS is missing something. The BLS uses two surveys to gauge the state of employment in America: the payroll survey and the household survey, which canvass homes and businesses separately. The payroll survey gets revised twice as new receipts data and other figures come in. The household survey suggested nearly 1 million new jobs in three months.

One interesting possible explanation for the increase in consumer confidence, the improvement in unemployment numbers and the drop in the number of people looking for jobs came from Jim Kramer on CNBC, who despite his antic manner and occasionally titanic bad calls is a guy with a lot of sources. He said that anecdotal information leads him to believe we may be seeing a growth in the shadow economy, with job seekers taking positions with small businesses off the books.

I’ve been talking about the squatter economy. People in their homes for 600 days, they haven’t paid. Those are people who can go to the mall, all right. Not paying your mortgage, get a lot of money away from that. Off the books income, staggering. Because if you’re an employer and you really do not want to pay all those taxes… the pressure to not pay your employees on the book is remarkable. There are a lot of people I know who are doing it.

This would make sense. Gray markets benefit employers and employees in the short term, as neither has to pay taxes. In the long term, these results are damaging, as state and national budgets, labor protections and general social cohesion get hurt. You see that most prominently nowadays in Greece, which had about one third of its economy off the books and which after 40 years of everyone cheating the greater public interest now has no reservoir of trust to fall back on in its moment of great crisis.

But even if Kramer is correct and some U.S. small businesses and unemployed workers are moving off books to get by, the U.S. is not even close to facing the traditional European gray market problems. Americans still believe in paying their taxes: 87% surveyed in 2010 said it was never acceptable to cheat on your income taxes, near its highest level, according to an IRS oversight board’s poll. And a little expansion in the gray market is stimulative.

Still, the shadow of the unresolved crisis in Europe continues to hang over the U.S. recovery. If the E.U. fails next Friday to deliver on hints of tighter integration of fiscal and monetary controls, the markets will tank, and rates for borrowing for European banks will spike, increasing the likelihood of a major bank failure. That could become the “Lehman Event” triggering another global credit crisis and potential recessions worldwide.